<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7335
LEE PHARMACEUTICALS
(Name of small business issuer in its charter)
CALIFORNIA 95-2680312
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 SANTA ANITA AVENUE, SOUTH EL MONTE, CALIFORNIA 91733 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. [X]
State issuer's revenues for its most recent fiscal year: $9,862,000 Gross
As of the close of business on November 30, 2000, the aggregate market value of
Lee Pharmaceuticals common stock held by nonaffiliates was $386,355.
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, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company is engaged in the 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 over-the-counter items,
health and beauty aids, cosmetics and prescription drug products containing
controlled substances 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 93% of total Company operations.
The Company's 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 or by outside product line acquisitions.
In fiscal 1998, the Company expanded its Lee(R) Lip-Ex(TM) line to include
lip balms with sunscreen protection and also packaged the Lip-Ex into convenient
tin top jars. The Company purchased several new OTC items including
PAIN-A-LAY(R), an oral anesthetic/analgesic, and EVAC-U-GEN(R), a chewable
laxative.
In fiscal 1999, the Company further expanded its Lee(R) Lip-Ex(TM) line to
include lip balms with an SPF 15 protection and packaged the Lip-Ex in tubes (2
flavors) and sticks (6 flavors). In addition, the Company purchased several
over-the-counter (OTC) brands and prescription drug products. On October 1,
1998, the Company acquired the following prescription drug products; Cheracol(R)
cough syrup, Comhist(R) decongestant tablets and Entuss(R) expectorant from
Roberts Pharmaceutical Corporation. On December 1, 1998, the Company acquired
seven OTC products from Numark Laboratories, Inc. On April 23, 1999, the Company
acquired Lady Esther(R) face cream and powder product line from Numark
Laboratories, Inc. On June 29, 1999, the Company purchased the Take-Off(R)
(premoistened makeup remover cloths) brand from Premier Consumer Products, Inc.
and Advanced Polymer Systems, Inc.
In fiscal 2000, the Company continued the expansion of the Lee(R)
Lip-Ex(TM) line to include 6 new "fun" flavored SPF 15 sticks. In addition, a
new line of lip gloss called "Sippers(TM)" was introduced. The Sippers(TM)
include 6 fun flavored lip glosses packaged in stick format. The target markets
include women and teenagers. On Novemer 15, 1999, the Company purchased Cope(R),
a tension headache relief tablet, and Astring-o-Sol(R), a concentrated
mouthwash, from U.S. Dermatologics, Inc. In addition, on January 31, 2000, the
Company acquired Serutan(R), toasted granules, a bulk-forming laxative, from
Numark Laboratories, Inc.
DOMESTIC CONSUMER PRODUCTS MARKETING
Consumer products are sold nationally, principally through major retail
drug, food and discount department store chains. In addition, the Lee(R)
Lip-Ex(TM) lip balm and Aquafilter(R) brands have national distribution in
convenience and independent novelty stores. 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 the Company operates in a highly
competitive environment. In the area of fingernail extension and
over-the-counter drugs, the Company competes with many companies, most of which
are larger and 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 the Company
two brands in this category.
The Company continues to expand its product line via a combination of
acquisitions and in-house development activity. The Company's consumer products
line 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 consumer 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.
2
<PAGE>
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 MSDSs 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 1999, 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), Beta Quartz glass ceramic inserts,
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, and dental dealers.
The Company plans and executes its own marketing programs.
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.
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.
3
<PAGE>
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(R), 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
<TABLE>
<CAPTION>
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
YEAR ENDED SEPTEMBER 30
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
(000) (000) (000)
United States export sales
(except Canada)................................................$ 276 $ 241 $ 430
</TABLE>
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,
2000 and 1999.
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 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.
4
<PAGE>
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, Processed
Foods 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.
Effective November 23, 1998, the Company applied for and was granted a
Controlled Substance License with the Drug Enforcement Agency (DEA). The license
is issued for one year and grants the Company the right to distribute
prescription drug products containing controlled substance (s). As of February
15, 2000, the Company's DEA license was renewed.
ENVIRONMENTAL PROTECTION REGULATION AND LITIGATION
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, 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 entered into the South El Monte Operable
Unit Site Participation Agreement with Cardinal pursuant to which, among other
things, Cardinal contracted with an environmental firm to conduct the Study. The
Study has been completed. The Company's share of the cost of the Study was
$15,000 and was accrued for in the financial statements as of September 30,
1995. The South El Monte Operable Unit (SEMOU) participants developed four
remedial alternatives. The capital cost of the four alternatives range from $0
(no action) up to $3.49 million. The estimated annual operating cost for the
four alternatives range from $0 (no action) to $770,300. Over a 30-year period,
the total cost of the four alternatives range from $0 (no action) up to $13.05
million. The EPA prefers an alternative which estimates the capital cost up to
$3.08 million, the annual operating cost at $.48 million, and the 30-year period
total cost up to approximately $9.09 million. The selection of the actual
alternative implemented is subject to public comment. At the present time, the
Company does not know what its share of the cost may be, if any. Therefore, no
additional accrual has been recognized as a liability on the Company's books.
The Company requested that the EPA conduct an "ability-to-pay evaluation" to
determine whether the Company is entitled to an early settlement of this matter
based upon a limited ability to pay costs associated with site investigation and
remediation. In August 2000, the EPA informed the Company that it does not
qualify for an early settlement at this time.
5
<PAGE>
The EPA has informed the Company that it has learned that the intermediate
zone groundwater contamination in the western portion of the SEMOU has migrated
further west and has now impacted the City of Monterey Park and Southern
California Water Company production wells. The EPA stated that the City of
Monterey Park Water Department, San Gabriel Valley Water Company and Southern
California Water Company are planning to build treatment facilities for their
wells. The EPA stated that these three water purveyors contacted some of the
SEMOU PRPs, other than the Company, to seek funding to develop groundwater
treatment facilities for the contaminated wells. A group of these PRPs calling
themselves the "South El Monte Cooperative Group" has been formed and
purportedly has reached a general agreement with the water purveyors to fund the
development of treatment facilities and use the water purveyors' wells in an
attempt to contain the groundwater contamination to meet EPA's goals. At this
time, the EPA has not reviewed or approved any specific plan to address
contamination at the purveyor wells, nor has the EPA compromised its right to
recover response costs from any person who is legally responsible for
contamination within the SEMOU. As of the date of this report, the Company has
not been contacted by the South El Monte Cooperative Group in respect to its
participation in any proposed cleanup activity. As a result, the Company is not
able to determine what contribution, if any, it may be assessed in connection
with this cleanup activity.
By letter dated November 13, 2000, the Company was notified that the City
of Monterey Park, San Gabriel Valley Water Company and Southern California Water
Company intend to bring suit under the Safe Drinking Water and Toxic Enforcement
Act of 1986 alleging that the Company has knowingly released volatile organic
compounds in the soil and shallow groundwater beneath the Company's property
between at least on or before November 8, 1996 and the present and has failed to
promptly clean up all of the contamination. As of the date of this report, the
Company has not been served with this lawsuit.
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 has 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. 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 $287,000 less the liability already
recognized on the books of $165,000 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 $287,000 figure above. In April 2000,
the Company received a Notice of Violation from the RWQCB. The Notice of
Violation states that the Company and other property owners were required to
submit a groundwater remedial action plan by November 1, 1999, and that the
RWQCB has been advised that the Company and the other property owners were
unable to submit the required remedial action plan because the Company and the
other property owners could not agree on the allocation of financial
responsibility to prepare the action plan. The RWQCB stated that it will no
longer encourage the cooperative approach among the Company and the other
property owners in completing the cleanup requirements and will pursue
appropriate measures, including when necessary, enforcement actions. The RWQCB
states that it may impose civil liability penalties of up to $1,000 per day from
November 1, 1999 for failure to file the action plan. In light of these events,
no assurances can be given that the cleanup costs and possible penalties will
not exceed the amount of the Company's current accruals of $287,000 (which
includes the $122,000 charge to income in the third quarter of fiscal 1998).
In July 2000, the property owners formed the Lidcombe & Santa Anita Avenue
Work Group (LSAAW) in response to the RWQCB request for the preparation of an
action plan. The LSAAW submitted a Focused Feasibility Study to the RWQCB for
their review and approval of the selected remedial action method for the site.
After receiving RWQCB approval, LSAAW obtained three cost proposals to implement
the RWQCB approved pump and treat remedial method. According to these cost
proposals, the lowest estimated costs for an assumed five (5) years of pump and
treat remediation is $600,000. This cost is lower than the previous cost
proposed work plan, discussed above, from Geomatrix Consultants, Inc. The
capital costs including contingencies are approximately $300,000. The LSAAW is
hopeful the Water Quality Authority (WQA) is willing and able to reauthorize its
grant for one-half (1/2) of the capital costs of its remediation system
construction not to exceed $150,000. It is estimated at this time that the
reserves for the Company's share of this cost proposal are adequate since its
prior accrual was based on the higher cost estimate from Geomatrix.
6
<PAGE>
Without any prior correspondence or inkling of the Company's potential
liability, the EPA 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. On June 30, 2000, the EPA
informed the Company that the EPA believed the Company is able to pay the full
settlement cost, but offered to reduce the amount of the settlement to $75,271.
The Company is in the process of responding to this letter.
The Company was 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. The Company,
the EPA and certain PRPs have entered into an agreement tolling the applicable
statutes of limitation. The Company was recently notified by the EPA that their
request for a waiver, due to financial hardship, was "partially granted."
Improvements in the bidding process has lowered the Company's estimated share
down to $245,000 (from $374,000) and of that, the EPA was requesting that the
Company pay $113,000, as a result of their findings on the application for
waiver due to financial hardship. The Company is considering the EPA's request.
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.
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 91 presently includes 31 permanent employees,
both salaried and hourly, and 60 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 16% and 12% of the Company's
net revenues during fiscal 2000 and 1999, 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.
7
<PAGE>
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.
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:
APPROXIMATE
SQUARE
ADDRESS FOOTAGE USAGE
------- ----------- -----
1428 Santa Anita Avenue 10,000 Chemical processing and filling
The Company leases the following:
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE LEASE
SQUARE ANNUAL EXPIRATION
ADDRESS FOOTAGE RENTAL DATE USAGE
------- ----------- --------- ---------- -----
<S> <C> <C> <C> <C>
1434 Santa Anita Avenue 11,000 $61,550* 11/30/2005 Inventory control, personnel, data processing,
accounting offices and dental production/shipping.
1460 Santa Anita Avenue (1) 15,000 75,604* 11/30/2005 Effective January 15, 1996, the building was
subleased.
1470 Santa Anita Avenue (2) 8,000 46,697* 11/30/2005 Effective July 16, 1996, the building was subleased.
1500 Santa Anita Avenue 18,000 95,486* 11/30/2005 Warehouse, consumer packaging operations,
injection molding and corrugated printing.
1516 Santa Anita Avenue 18,000 93,706* 11/30/2005 Sales/marketing offices, purchasing, consumer
shipping, and warehouse.
1444 Santa Anita Avenue (3) 10,000 69,030* 11/30/2005 Executive office, consumer production,
quality control and bottle printing.
1427 Lidcombe Avenue 6,000 31,804* 11/30/2005 Maintenance and chemical processing
(rear building).
1425 Lidcombe Avenue 6,000 31,804* 11/30/2005 Chemical processing and packaging.
1445 Lidcombe Avenue (3) (4) 8,000 64,962* 11/30/2005 As of 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 $4,145.
</TABLE>
* Revised biannually for consumer price index change.
(1) The Company entered into a sublease agreement, effective January 15, 1996,
which expired November 30, 2000. The gross annual rental income was
$70,644. The sublessee tenant vacated the property, and the Company has not
entered into any other sublease with respect to this property.
(2) The Company entered into a sublease agreement, effective July 16, 1996,
which expired November 30, 2000. The gross annual rental income was
$40,320. On November 27, 2000, the Company entered into a new sublease
commencing December 1, 2000, for twenty-four (24) months, in the amount of
$7,280 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 $4,145. 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 (sublease expired
November 30, 2000, pending new sublease tenant), 1460 Santa Anita Avenue
(renewed sublease effective December 1, 2000), 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.
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.
8
<PAGE>
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.
The Company's Common Stock trades 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 2000 1Q $ .23 $ .16
2Q .85 .16
3Q .32 .18
4Q .22 .18
FY 1999 1Q $ .21 $ .16
2Q .20 .16
3Q .20 .16
4Q .25 .17
</TABLE>
There were approximately 734 shareholders of record of the Company's Common
Stock as of the close of business on September 30, 2000.
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, 2000, AND SEPTEMBER 30, 1999
In fiscal 2000, net revenues increased 5% to $8,801,000 from $8,379,000 in
fiscal 1999. The increase in net revenues was due to the volume generated from
the Lee(R) Lip-Ex(TM) lip balm line plus the newly acquired brands such as:
Cope(R), Astring-o-Sol(R), Lady Esther(R), Serutan(R) and Take-Off(R). The
recently acquired brand acquisitions accounted for approximately $1,140,000 or
13% of the Company's total net revenues. The increase in net revenues was
somewhat offset by the continued reduced sales of the nail category products,
plus lower volume of certain over-the-counter items, and depilatories. In
addition, the Company's sales returns increased approximately $420,000 or 66%
when comparing fiscal years 2000 and 1999. The excessive sales return volume was
the result of the discontinuance of one of the Company's SKUs (stock keeping
units) at the retail store level, plus the recall of a distributed product
manufactured by one of the Company's co-packers, along with higher comparative
returns of Lee(R) Lip-Ex(TM). Also, in September, the Company increased its
merchandise return allowance by $125,000. The additional allowance was the
result of anticipated product returns of a brand containing phenylpropanolamine
(PPA) which the Food and Drug Administration (FDA) intends to rule as
nonmonograph.
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
convenience and independent novelty stores in an attempt to increase the number
of outlets carrying the Company's products.
Cost of sales as a percentage of gross revenues for fiscal 2000 and 1999
were 43% and 42% respectively. The higher cost of sales percentage was due to an
increase in the Company's inventory obsolescence reserve during the current
fiscal year ($80,000) and a change in the product mix.
Selling and advertising expenses decreased $180,000 or 6% when comparing
fiscal years 2000 and 1999. The decreased expenses were basically due to the
following factors: (1) finalization of several royalty commitments related to
prior brand acquisitions ($191,000), (2) reduction in media print and television
advertising ($62,000), (3) lower salesmen salaries and related fringe benefits
due to the replacement of three existing salesmen with two outside sales
personnel ($48,000), (4) lower consulting services ($25,000), and (5) lower
cooperative advertising costs ($36,000). The above decreases were partially
offset by increases in: (1) amortization expenses ($99,000) the result of recent
brand acquisitions, (2) an accrual of bad debt expense ($30,000), and (3) higher
freight costs ($73,000).
9
<PAGE>
General and administrative expenses decreased $158,000 or 12% when
comparing fiscal years 2000 and 1999. This decrease was principally due to: (1)
lower management information systems (MIS) consulting services related to
electronic data interchange (EDI) and Year 2000 readiness ($80,000), (2) lower
software costs associated with Year 2000 readiness ($8,000), (3) reduced travel
and entertainment expenses ($26,000), (4) a reduction in temporary help expenses
($14,000), and (5) lower supplies and printing expenses ($14,000).
Interest expense increased $107,000 or 14% when comparing fiscal years 2000
and 1999. The increased interest expense was attributed to the increased
borrowing from the Company's asset based financing lender, higher private
borrowings on notes payable at a higher interest rate and a higher average prime
interest rate charged in fiscal year 2000 (8.92%) versus fiscal year 1999
(7.89%) related to certain loans which are tied to prime.
Gain on sale of buildings relates to the sale leaseback arrangement since
1991 whereby the Company is recognizing a constant deferred gain over the lease
term. The remaining balance of $11,000 will be recognized as deferred gain in
fiscal 2001.
The Company accrued a $374,000 charge in the first quarter of fiscal year
1999, as an extraordinary item, with respect to a possible liability. The
Company was 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 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 EPA has a settlement offer to the Company
with respect to the Site for a cost of $373,950. The Company has elected to file
for relief from these obligations under the financial hardships option in the
EPA's response form. The Company, the EPA and certain PRPs have entered into an
agreement tolling the applicable statutes of limitation. The Company was
recently notified by the EPA that their request for a waiver, due to financial
hardship, was "partially granted." Improvements in the bidding process has
lowered the Company's estimated share down to $245,000 (from $374,000) and of
that, the EPA was requesting that the Company pay $113,000, as a result of their
findings on the application for waiver due to financial hardship. The Company is
considering the EPA's request.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was a negative $2,332,000 at September 30, 2000, as
compared with a negative $2,409,000 at September 30, 1999. The increase in
working capital of $77,000 was basically due to an increase in current assets of
$204,000 (net accounts receivable) and deposits ($148,000). Current liabilities
showed a modest decrease due to a decrease in accounts payable and accrued
liabilities. This decrease was partially offset by the increase in additional
borrowing from an outside lender. The ratio of current assets to current
liabilities was .6 to 1 at September 30, 2000 and September 30, 1999.
In comparing fiscal years 2000 and 1999, accounts receivable turnover
decreased (9.0 versus 9.4) and the number of day's sales were in average
accounts receivable increased (33 days versus 32 days). This data was relatively
constant during fiscal years 2000 and 1999 due to continued collection efforts.
Accounts payable as a percentage of total costs and expenses was 12% in fiscal
2000 versus 14% in fiscal 1999 due to the Company's extended payment terms from
certain suppliers.
A decrease in inventory of $44,000 was due to a reduction of slow moving
items, at a price below the listed sales price, and scrapping of obsolete
inventory. This was partially offset by inventory acquired from product line
acquisitions.
Effective May 19, 2000, the Company renewed its accounts receivable
financing, maturing May 2002, whereby 75% of the eligible domestic accounts
receivable can be advanced. The total amount advanced cannot exceed $1,400,000
less amounts loaned on inventory, not to exceed $400,000. The agreement is
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 financing agreement includes a $400,000
inventory loan, which is incorporated in the working capital line of credit
above. This inventory loan requires monthly payments of $11,110 with an interest
rate of 6% above Bank of America's prime rate. In addition, the Company has a
separate equipment term loan in the amount of $579,000 and requires monthly
payments of $15,400 plus interest at Bank of America's prime rate plus 6%. All
of the above loans are personally guaranteed by the Company's President and are
secured by 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 $7,259,000. The Company's past
recurring losses and fiscal 2000 and 1997's nominal profits 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 2000 and 1999.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER
<S> <C>
Independent Auditor's Report 12
Prior Independent Auditor's Report 13
Financial Statements:
Balance sheet as of September 30, 2000 14
Statements of operations for the years ended
September 30, 2000 and September 30, 1999 15
Statements of stockholders' (deficit) for the years ended
September 30, 2000 and September 30, 1999 16
Statements of cash flows for the years ended
September 30, 2000 and September 30, 1999 17
Notes to financial statements 18-28
</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.
11
<PAGE>
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Lee Pharmaceuticals
We have audited the balance sheet of Lee Pharmaceuticals (a California
corporation) as of September 30, 2000, and the related statements of
operations, stockholders' (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements
of Lee Pharmaceuticals as of September 30, 1999, were audited by other
auditors whose report dated December 13, 1999, on those statements
included explanatory paragraphs regarding the Company's going concern
uncertainty and environmental remediation issues. That auditor's report
is attached to these financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we 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. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the September 30, 2000, financial statements referred
to above present fairly, in all material respects, the financial
position of Lee Pharmaceuticals as of September 30, 2000, and the
results of its operations and its cash flows for the year then ended 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 discussed in Note 1 to
the financial statements, the Company has not shown a trend for
generating sufficient net income and cash flow from normal operations.
Those conditions raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 11 to the financial statements, the Company is
named in several environmental remediation actions. Although the
Company has accrued a liability in the amount of $740,000, the total
costs of these actions cannot be presently determined.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
Caldwell, Becker, Dervin, Petrick & Co., L.L.P.
Woodland Hills, California
December 5, 2000
20750 Ventura Boulevard, Suite 140 . Woodland Hills, CA 91364
(818) 704-1040 - (213) 873-1040 - Fax (818) 704-5536
12
<PAGE>
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, 1999 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, 1999. 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, 1999, and the results of its operations and its cash flows for
each of the years in the two-year period ended September 30, 1999, 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 one of its
cleanup cost liabilities, however, the ultimate outcome of this liability
cannot presently be determined.
GEORGE BRENNER
George Brenner, CPA
December 13, 1999
Beverly Hills, California
13
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash ...................................................................... $ 12,000
Accounts receivable, less allowance for doubtful accounts of $43,000
and sales returns allowance of $302,000 ................................. 1,097,000
Due from related party .................................................... 25,000
Inventories ............................................................... 2,287,000
Deposits .................................................................. 391,000
Other current assets ...................................................... 103,000
------------
TOTAL CURRENT ASSETS .................................................... 3,915,000
------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land ...................................................................... 49,000
Building .................................................................. 217,000
Machinery and equipment ................................................... 4,901,000
Leasehold improvements .................................................... 377,000
------------
5,544,000
Less accumulated depreciation and amortization ............................ (5,008,000)
------------
NET PROPERTY, PLANT AND EQUIPMENT ....................................... 536,000
------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $7,552,000 .......... 2,981,000
Non-current deposits ...................................................... 35,000
------------
TOTAL OTHER ASSETS ...................................................... 3,016,000
------------
TOTAL ........................................................................ $ 7,467,000
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft ............................................................ $ 350,000
Notes payable - bank ...................................................... 927,000
Current portion - notes payable, other .................................... 1,952,000
Current portion - note payable related party .............................. 550,000
Accounts payable .......................................................... 951,000
Accrued royalties ......................................................... 39,000
Accrued liabilities ....................................................... 368,000
Environmental cleanup liability ........................................... 366,000
Due to related parties .................................................... 733,000
Deferred income ........................................................... 11,000
------------
TOTAL CURRENT LIABILITIES ............................................... 6,247,000
LONG-TERM NOTES PAYABLE - BANK ............................................... 497,000
LONG-TERM NOTES PAYABLE TO RELATED PARTIES ................................... 2,374,000
LONG-TERM NOTES PAYABLE, OTHER ............................................... 599,000
ENVIRONMENTAL CLEANUP LIABILITY - CASMALIA SITE .............................. 374,000
------------
TOTAL LIABILITIES ....................................................... 10,091,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT):
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) ..................................................... (7,259,000)
------------
TOTAL STOCKHOLDERS' (DEFICIT) ........................................... (2,624,000)
------------
TOTAL ........................................................................ $ 7,467,000
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
GROSS REVENUES ............................................. $ 9,862,000 $ 9,020,000
Less: Sales returns, discounts and allowances ........... (1,061,000) (641,000)
----------- -----------
NET REVENUES ............................................... 8,801,000 8,379,000
----------- -----------
COSTS AND EXPENSES:
Cost of sales ........................................... 4,205,000 3,749,000
Selling and advertising ................................. 2,672,000 2,852,000
General and administrative .............................. 1,113,000 1,271,000
----------- -----------
TOTAL COSTS AND EXPENSES ................................... 7,990,000 7,872,000
----------- -----------
OPERATING INCOME ........................................... 811,000 507,000
INTEREST EXPENSE ........................................... (859,000) (752,000)
GAIN ON SALE OF BUILDINGS AND OTHER ........................ 65,000 65,000
OTHER (LOSS) INCOME ........................................ (1,000) 13,000
----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ................ 16,000 (167,000)
EXTRAORDINARY LOSS RELATED TO CASMALIA DISPOSAL SITE CLEANUP -- (374,000)
----------- -----------
NET INCOME (LOSS) .......................................... $ 16,000 $ (541,000)
=========== ===========
PER SHARE:
Basic income (loss) per share before extraordinary loss . $ .00 $ (.04)
Extraordinary loss ...................................... -- (.09)
----------- -----------
Basic income (loss) per share ........................... $ .00 $ (.13)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF STOCKHOLDERS' (DEFICIT)
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, 1998 4,135,162 $ 413,000 $ 4,222,000 $(6,734,000) $(2,099,000)
Net (loss) (541,000) (541,000)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 4,135,162 413,000 4,222,000 (7,275,000) (2,640,000)
Net income 16,000 16,000
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2000 4,135,162 $ 413,000 $ 4,222,000 $(7,259,000) $(2,624,000)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................................... $ 16,000 $ (541,000)
Loss from extraordinary item - unpaid ................................................... -- 374,000
----------- -----------
Net income (loss) before extraordinary item ............................................. 16,000 (167,000)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation ............................................................................ 157,000 135,000
Amortization of intangibles ............................................................. 880,000 881,000
(Decrease) in deferred income ........................................................... (65,000) (65,000)
Loss (gain) on disposal of property, plant and equipment ................................ 1,000 (13,000)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable .............................................. (390,000) 21,000
(Increase) decrease in allowance for doubtful accounts
and sales returns and allowances ...................................................... 186,000 (20,000)
Decrease (increase) in inventories ...................................................... 44,000 (209,000)
(Increase) in deposits .................................................................. (148,000) (14,000)
Decrease in other current assets ........................................................ 108,000 63,000
(Decrease) increase in accounts payable and accrued liabilities ......................... (418,000) 322,000
Increase in due to related parties-accrued interest ..................................... 63,000 131,000
Increase in environmental cleanup liabilities ........................................... -- 77,000
Increase (decrease) in accrued royalties ................................................ 13,000 (395,000)
----------- -----------
Total adjustments ....................................................................... 431,000 914,000
----------- -----------
Net cash provided by operating activities ............................................. 447,000 747,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .............................................. (274,000) (79,000)
Proceeds from sale of equipment ......................................................... 1,000 13,000
Acquisition of product brands ........................................................... (249,000) (1,350,000)
----------- -----------
Net cash (used in) investing activities ............................................... (522,000) (1,416,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related party ............................................ 90,000 --
(Payments on) notes payable to related party ............................................ (10,000) (14,000)
(Increase) in due from related party .................................................... (19,000) (147,000)
(Decrease) increase in notes payable .................................................... (60,000) 1,089,000
Proceeds from notes payable, other ...................................................... 1,050,000 --
Payments on notes payable, other ........................................................ (1,226,000) (303,000)
Increase in bank overdraft .............................................................. 258,000 6,000
----------- -----------
Net cash provided by financing activities ............................................. 83,000 631,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................................................ 8,000 (38,000)
Cash, beginning of year .................................................................... 4,000 42,000
----------- -----------
Cash, end of year .......................................................................... $ 12,000 $ 4,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................................................ $ 747,000 $ 654,000
=========== ===========
Taxes ................................................................................... $ 1,000 $ 1,000
=========== ===========
NON CASH FINANCING AND INVESTING ACTIVITY:
Acquisition of product brands:
Fair value of assets acquired ........................................................... $ 394,000 $ 2,217,000
Fair value of liabilities incurred ...................................................... (145,000) (867,000)
----------- -----------
Net cash payments ..................................................................... $ 249,000 $ 1,350,000
=========== ===========
Offset of related party loan receivables and payables ...................................... $ 148,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
LEE PHARMACEUTICALS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is engaged in the 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 over-the-counter items, health and
beauty aids, cosmetics and prescription drug products containing
controlled substances 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 93% 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 $7,259,000. 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 to increase
profitability by increasing sales, control expenses and seek
additional financing from outside lenders. 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.
RECLASSIFICATIONS
The September 20, 1999 cash flow statement contains certain
reclassifications which were made to conform to the September 30,
2000 financial statement format. None of these reclassifications
affected net income, shareholders' equity or cash flow.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers cash and cash equivalents to include cash on hand, bank
balances, money markets and short-term investments with a maturity
of three months or less.
ACCOUNTS RECEIVABLE
The Company provides an allowance for doubtful accounts and
reserve for returned merchandise. The Company's estimates are
based on historical collection and return experience and a review
of the current status of trade accounts receivable. It is
reasonably possible that the Company's estimate of the allowance
for doubtful accounts will change.
INVENTORIES
Inventories are stated at the lower of average cost or market
using the first-in, first-out method.
DEPRECIATION AND AMORTIZATION
Property and Equipment
Property and equipment are recorded at cost. Expenditures for
major additions and improvements are capitalized, and minor
replacements, maintenance, and repairs are charged to expense
as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss
is included in the results of operations for the respective
period. Amortization and depreciation are computed on the
methods used for federal income tax purposes using the
following lives:
Building 31 years
Machinery and equipment 5-7 years
Leasehold improvements 39 years
Depreciation expense was $157,000 and $135,000 for the years
ended September 30, 2000 and 1999 respectively.
Intangibles
Intangible assets are being amortized under the straight-line
method using the following lives:
Goodwill 48 months - 240 months
Covenants not to compete 36 months - 120 months
Royalty agreements 30 months - 60 months
Other 24 months - 60 months
Amortization expense was $880,000 and $881,000 for the years
ended September 30, 2000 and 1999 respectively.
18
<PAGE>
EXTRAORDINARY ITEM - 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 $374,000 has
been accrued, as an extraordinary item, in fiscal 1999 for the
Casmalia Disposal Site cleanup. Management believes that the total
amount provided at September 30, 2000 for remedial cost studies is
adequate based on current information available. See Note 11 -
"Assessment for environmental cleanup."
MAJOR CUSTOMER
The Company had one major customer with sales volume approximating
16% and 12% of the Company's net revenues for the years ending
September 30, 2000, and 1999, respectively. The amount due from
the customer was $332,000 and $145,000 at September 30, 2000, and
1999, respectively, and is included in accounts receivable in
these financial statements. The Company has two vendors that
accounted for 16% of the total inventory purchased for the fiscal
year ended September 30, 2000.
REVENUE RECOGNITION
The Company recognizes revenues from sales when goods have been
shipped, there are no material uncertainties regarding customer
acceptance, collection of the resulting receivable is deemed
probable, and no other significant vendor obligations exist.
Expenses are recognized when services have been performed or
inventory items have been used. Chemical items are recognized as
inventory once Quality Control testing is in compliance with the
Company specifications.
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.
DEFERRED INCOME TAX ACCOUNTS
Deferred tax provisions/benefits are calculated for certain
transactions and events because of differing treatments under
generally accepted accounting principles and the currently enacted
tax laws of the federal government. The results of these
differences on a cumulative basis, known as temporary differences,
result in the recognition and measurement of deferred tax assets
and liabilities in the accompanying balance sheet. The liability
method (FASB No. 109) is used to account for these temporary
differences.
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.
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.
LONG-LIVED ASSETS
The Company accounts for long-lived assets at cost. The Company's
long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If such assets are considered
impaired, they are reduced to fair value. During fiscal year ended
September 30, 2000, no impairment write-downs were recorded.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for
fiscal years ended September 30, 2000 and 1999 were $279,000 and
293,000 respectively.
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.
19
<PAGE>
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 2000 and 1999; volatility factors of the
expected market price of the Company's common stock of 76% for
2000 and 50% for 1999; and expected life of the options of two
years. These assumptions resulted in weighted average fair values
of $.18 and $.08 per share for stock options outstanding in 2000
and 1999 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 2000 and 1999 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>
2000 1999
---- ----
<S> <C> <C>
Pro forma income (loss) $ 16 $ (541)
Pro forma income (loss) per share $ .00 $ (0.13)
</TABLE>
Information regarding stock options outstanding as of September
30, 2000 is included in Note 12 - "Stock Options."
NOTE 2 - EARNINGS PER SHARE OF COMMON STOCK
The Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 is
intended to simplify the earnings per share computations and make
them more comparable from company to company.
Net income/loss per share is computed using the weighted average
number of common shares outstanding during the period. Stock
options have not been considered in the calculation of income/loss
per share because they are anti-dilutive.
Basic income/loss per share for fiscal 2000 and 1999 are based on
4,135,162 common shares outstanding. Common stock equivalents
(common stock options) were not considered in the basic loss per
share calculation since the effect is anti-dilutive.
NOTE 3 - DUE FROM RELATED PARTY
The Company has an advance to a related party for a total of
$25,000. The advance is unsecured, non-interest bearing, and due
on demand. Subsequent to year end this amount has been repaid in
full.
NOTE 4 - INVENTORIES
Inventories consist of the following at September 30, 2000:
<TABLE>
<S> <C>
Raw materials..................................... $ 2,052,000
Work-in-process................................... 333,000
Finished goods.................................... 419,000
------------------
2,804,000
Allowance for obsolescence........................ (517,000)
------------------
Total............................................. $ 2,287,000
==================
</TABLE>
NOTE 5 - INTANGIBLE ASSETS
The Company acquired certain product lines in 2000 (See Note 16)
and prior years. Amounts related to these acquisitions were
allocated to intangible assets. Included in intangible assets at
September 30, 2000, are the following:
<TABLE>
Cost
<S> <C>
Goodwill.......................................... $ 2,583,000
Covenants not to compete.......................... 5,060,000
Trademark......................................... 322,000
Royalty agreements................................ 2,192,000
Other............................................. 376,000
------------------
Total............................................. 10,533,000
Less: accumulated amortization.................... (7,552,000)
------------------
Intangibles - net................................. $ 2,981,000
==================
</TABLE>
20
<PAGE>
NOTE 6 - NOTES PAYABLE - BANK
<TABLE>
<S> <C>
Note payable to bank (accounts receivable financing), secured by
accounts receivable, equipment, inventories, and certain other
assets, maximum revolving advance is $1,400,000 (based on domestic
accounts receivable as defined in the agreement less amounts
loaned on inventory, not to exceed $400,000, can be advanced),
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 2000 and is renewable for successive two year
periods thereafter. The continuing personal guarantee by the
Company's President, of the obligations of the Company, remains in
force. $ 609,000
Note payable to bank, secured by inventory, maximum amount of term
loan is $400,000, requires monthly payments of $11,110 plus
interest at the bank's prime rate plus 6%, maturing May 2002. 355,000
Note payable to bank, maximum amount of term loan is $400,000,
secured by the Company's machinery and equipment, requires monthly
payments of $8,300 plus interest at the bank's prime rate plus 6%,
maturing May 2002. 366,000
Note payable to bank, maximum amount of term loan is $179,000,
secured by the Company's machinery and equipment, requires monthly
payments of $7,100 plus interest at the bank's prime rate plus 6%,
maturing May 2002. 94,000
-------------
1,424,000
Less current portion (927,000)
-------------
$ 497,000
=============
NOTE 7 - 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 2000 and 1999
was $65,000.
The amounts of rents paid to related parties were $134,000 and
$133,000 for September 30, 2000, and 1999, respectively.
During the fiscal year ending September 30, 2000, the total
interest expensed to related parties (Note 9) was $269,000 of
which $128,000 was paid. Included in due to related parties, as of
September 30, 2000, was accrued interest of $711,000.
During the fiscal year ending September 30, 1999, the total
interest expensed to related parties (Note 9) was $247,000 of
which $149,000 was paid.
NOTE 8 - NOTES PAYABLE - OTHER
Notes payable to bank, secured by a deed on land and building,
requires monthly pay-ments 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 of the Company $ 194,000
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 in the Wall
Street Journal during the previous month. The interest rate at
September 30, 2000, was 9.5%. 238,000
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. 66,000
Note payable, secured by product brands, bearing interest at 20%,
interest payable monthly, maturity June 1, 2001. 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. 160,000
Note payable, secured by product brand, bearing interest at 20%.
The note, as renewed, matures December 1, 2001. Interest only
payments are made monthly. 50,000
Note payable to seller on acquisition of product brand inventory
payable in equal monthly installments of $6,283, plus interest,
until November 1, 2000, with any unpaid balance payable December
1, 2000. The interest rate is the highest prime rate in the Wall
Street Journal during the previous month. The interest rate at
September 30, 2000, was 9.5%. 63,000
Note payable to seller on acquisition of product brands payable in
equal monthly installments of $2,786, plus interest, until
November 1, 2000, with any unpaid balance payable December 1,
2000. The interest rate is the highest prime rate in the Wall
Street Journal during the previous month. The interest rate at
September 30, 2000, was 9.5%. 28,000
21
<PAGE>
Note payable, secured by equipment, payable in equal monthly
installments of $14,000, plus interest at 15%, until November 1,
2001, with any unpaid balance payable December 1, 2001. 192,000
Note payable to seller on acquisition of product brand payable in
equal monthly installments of $12,000, plus interest, until
September 15, 2001. The interest rate is the highest prime rate in
the Wall Street Journal during the previous month. The interest
rate at September 30, 2000, was 9.5%. 192,000
Note payable to seller on acquisition of product brand payable in
equal monthly installments of $20,000, plus interest, until
September 15, 2001. The interest rate is the highest prime rate in
the Wall Street Journal during the previous month. The interest
rate at September 30, 2000, was 9.5%. 320,000
Note payable, secured by product brand, payable in monthly
installments of $10,000, plus interest at 20%, commencing August
15, 1999. 60,000
Note payable, secured by product brand, payable in monthly
installments of $5,000, plus interest at 20%, commencing October
20, 1999. 40,000
Note payable, secured by product brands, payable in monthly
installments of $10,000, plus interest at 20%, commencing December
25, 1999. 100,000
Note payable to seller on acquisition of product brand payable in
monthly installments of $8,000, plus interest, until January 1,
2002. The interest rate is the highest prime rate in the Wall
Street Journal during the previous month. The interest rate at
September 30, 2000, was 9.5%. The note is guaranteed by the
President of the Company. 128,000
Note payable, secured by product brand, payable in monthly
installments of $10,000, plus interest, at 20%, commencing
February 20, 2000. 220,000
Note payable, unsecured, payable in monthly installments of
$10,000, plus interest at 20%, commencing June 20, 2000. 260,000
Note payable, unsecured, payable in monthly installments of
$10,000, plus interest at 20%, commencing September 25, 2000. 240,000
------------
2,551,000
Less current portion (1,952,000)
------------
$ 599,000
============
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties, unsecured, bearing interest at
bank's prime rate (9.5% at September 30, 2000), maturing January
2005. $ 60,000
Note payable to related party, unsecured, bearing interest at
bank's prime rate (9.5% at September 30, 2000), principal is
maturing and accrued interest is payable in January 2005. 2,000
Note payable to related party, unsecured, bearing interest at
bank's prime rate (9.5% at September 30, 2000), principal is
maturing and accrued interest is payable in January 2005. 372,000
Notes payable to related party, secured by product brand, bearing
interest at bank's prime rate (9.5% at September 30, 2000),
principal is maturing and accrued interest is payable in January
2005. 400,000
Note payable to related party, unsecured, bearing interest at
bank's prime rate (9.5% at September 30, 2000), and principal
payable based on a twelve (12) year fully amortized schedule
commencing March 15, 1997. Monthly payments are not being made
on this note. 1,440,000
Notes payable to related party, secured by product brand, bearing
interest at bank's prime rate (9.5% at September 30, 2000),
principal is maturing and accrued interest is payable in January
2005. 200,000
Note payable to related party, secured by product brand, bearing
interest at bank's prime rate (9.5% at September 30, 2000),
principal is maturing and accrued interest is payable in January
2005. 100,000
Note payable to related party, unsecured, bearing interest at
bank's prime rate (9.5% at September 30, 2000), principal is
maturing and accrued interest is payable in January 2005. 250,000
Note payable to officer, unsecured, bearing interest at bank's
prime rate (9.5% at September 30, 2000), maturing January 2005. 10,000
Note payable to officer, unsecured, bearing interest at 5.9% on
$68,000 and 6.99% on $22,000. Monthly payments are based on credit
card minimum, no due date stated. 90,000
------------
2,924,000
Less current portion ($495,000 in arrears) (550,000)
------------
$ 2,374,000
=============
</TABLE>
22
<PAGE>
NOTE 10 - LONG-TERM DEBT MATURITIES
At September 30, 2000, the Company was committed to the following
minimum principal payments.
<TABLE>
<CAPTION>
YEAR ENDING NOTES PAYABLE RELATED
SEPTEMBER 30, BANK PARTIES OTHERS
<S> <C> <C> <C>
2001 $ 927,000 $ 550,000 $ 1,952,000
2002 497,000 210,000 434,000
2003 - 120,000 44,000
2004 - 120,000 24,000
2005 - 120,000 24,000
Thereafter - 1,804,000 73,000
------------ ------------ ------------
Total $ 1,424,000 $ 2,924,000 $ 2,551,000
============ =========== ============
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At September 30, 2000, 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>
2001 $ 430,000 $ 137,000
2002 430,000 137,000
2003 430,000 137,000
2004 430,000 137,000
2005 430,000 137,000
Thereafter 72,000 23,000
------------ ------------
Total $ 2,222,000 $ 708,000
============ ============
</TABLE>
The leases, which expire November 30, 2000, have been renewed. The
new expiration date for these leases is November 30, 2005. The
renewal calls for Consumer Price Index (based on Los Angeles -
Riverside - Orange County: All items - All Urban Consumers)
adjustments on December 1, 2000, December 1, 2002 and December 1,
2004. The lessee has an option to renew at the end of all lease
terms.
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, 2000, and 1999, was $573,000 and
$521,000 respectively.
Some of the above leases are subleased to other companies.
Sublease income was $166,000 and $150,000 for fiscal years ended
September 30, 2000 and 1999 respectively. One sublease is month to
month and the other two expire November 30, 2000. See Note 17 -
"Subsequent Events (Unaudited)."
<TABLE>
<CAPTION>
YEAR ENDING SUBLEASE
SEPTEMBER 30, REVENUES
<S> <C>
2001 $ 18,400
</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
remediating the contamination on its property. The EPA has not
taken any further action in this matter, but may do so in the
future.
23
<PAGE>
The Company and nearby property owners, in consort with their
comprehensive general liability (CGL) carriers, 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 entered into the South El
Monte Operable Unit Site Participation Agreement with Cardinal
pursuant to which, among other things, Cardinal contracted with an
environmental firm to conduct the Study. The Study has been
completed. The Company's share of the cost of the Study was
$15,000 and was accrued for in the financial statements as of
September 30, 1995. The South El Monte Operable Unit (SEMOU)
participants developed four remedial alternatives. The capital
cost of the four alternatives range from $0 (no action) up to
$3.49 million. The estimated annual operating cost for the four
alternatives range from $0 (no action) to $770,300. Over a 30-year
period, the total cost of the four alternatives range from $0 (no
action) up to $13.05 million. The EPA prefers an alternative which
estimates the capital cost up to $3.08 million, the annual
operating cost at $.48 million, and the 30-year period total cost
up to approximately $9.09 million. The selection of the actual
alternative implemented is subject to public comment. At the
present time, the Company does not know what its share of the cost
may be, if any. Therefore, no additional accrual has been
recognized as a liability on the Company's books. The Company
requested that the EPA conduct an "ability-to-pay evaluation" to
determine whether the Company is entitled to an early settlement
of this matter based upon a limited ability to pay costs
associated with site investigation and remediation. In August
2000, the EPA informed the Company that it does not qualify for an
early settlement at this time.
The EPA has informed the Company that it has learned that the
intermediate zone groundwater contamination in the western portion
of the SEMOU has migrated further west and has now impacted the
City of Monterey Park and Southern California Water Company
production wells. The EPA stated that the City of Monterey Park
Water Department, San Gabriel Valley Water Company and Southern
California Water Company are planning to build treatment
facilities for their wells. The EPA stated that these three water
purveyors contacted some of the SEMOU PRPs, other than the
Company, to seek funding to develop groundwater treatment
facilities for the contaminated wells. A group of these PRPs
calling themselves the "South El Monte Cooperative Group" has been
formed and purportedly has reached a general agreement with the
water purveyors to fund the development of treatment facilities
and use the water purveyors' wells in an attempt to contain the
groundwater contamination to meet EPA's goals. At this time, the
EPA has not reviewed or approved any specific plan to address
contamination at the purveyor wells, nor has the EPA compromised
its right to recover response costs from any person who is legally
responsible for contamination within the SEMOU. As of the date of
this report, the Company has not been contacted by the South El
Monte Cooperative Group in respect to its participation in any
proposed cleanup activity. As a result, the Company is not able to
determine what contribution, if any, it may be assessed in
connection with this cleanup activity.
By letter dated November 13, 2000, the Company was notified that
the City of Monterey Park, San Gabriel Valley Water Company and
Southern California Water Company intend to bring suit under the
Safe Drinking Water and Toxic Enforcement Act of 1986 alleging
that the Company has knowingly released volatile organic compounds
in the soil and shallow groundwater beneath the Company's property
between at least on or before November 8, 1996 and the present and
has failed to promptly clean up all of the contamination. As of
the date of this report, the Company has not been served with this
lawsuit.
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.
24
<PAGE>
The Company believes the City of South El Monte does not appear to
be located over any of the major plumes. However, the EPA has
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. 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 $287,000 less the liability already recognized on the
books of $165,000 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 $287,000 figure above. In
April 2000, the Company received a Notice of Violation from the
RWQCB. The Notice of Violation states that the Company and other
property owners were required to submit a groundwater remedial
action plan by November 1, 1999, and that the RWQCB has been
advised that the Company and the other property owners were unable
to submit the required remedial action plan because the Company
and the other property owners could not agree on the allocation of
financial responsibility to prepare the action plan. The RWQCB
stated that it will no longer encourage the cooperative approach
among the Company and the other property owners in completing the
cleanup requirements and will pursue appropriate measures,
including when necessary, enforcement actions. The RWQCB states
that it may impose civil liability penalties of up to $1,000 per
day from November 1, 1999 for failure to file the action plan. In
light of these events, no assurances can be given that the cleanup
costs and possible penalties will not exceed the amount of the
Company's current accruals of $287,000 (which includes the
$122,000 charge to income in the third quarter of fiscal 1998).
In July 2000, the property owners formed the Lidcombe & Santa
Anita Avenue Work Group (LSAAW) in response to the RWQCB request
for the preparation of an action plan. The LSAAW submitted a
Focused Feasibility Study to the RWQCB for their review and
approval of the selected remedial action method for the site.
After receiving RWQCB approval, LSAAW obtained three cost
proposals to implement the RWQCB approved pump and treat remedial
method. According to these cost proposals, the lowest estimated
costs for an assumed five (5) years of pump and treat remediation
is $600,000. This cost is lower than the previous cost proposed
work plan, discussed above, from Geomatrix Consultants, Inc. The
capital costs including contingencies are approximately $300,000.
The LSAAW is hopeful the Water Quality Authority (WQA) is willing
and able to reauthorize its grant for one-half (1/2) of the
capital costs of its remediation system construction not to exceed
$150,000. It is estimated at this time that the reserves for the
Company's share of this cost proposal are adequate since its prior
accrual was based on the higher cost estimate from Geomatrix.
Without any prior correspondence or inkling of the Company's
potential liability, the EPA 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. On June 30, 2000, the
EPA informed the Company that the EPA believed the Company is able
to pay the full settlement cost, but offered to reduce the amount
of the settlement to $75,271. The Company is in the process of
responding to this letter.
The Company was 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. The Company, the EPA and certain PRPs have entered
into an agreement tolling the applicable
25
<PAGE>
statutes of limitation. The Company was recently notified by the
EPA that their request for a waiver, due to financial hardship,
was "partially granted." Improvements in the bidding process has
lowered the Company's estimated share down to $245,000 (from
$374,000) and of that, the EPA was requesting that the Company pay
$113,000, as a result of their findings on the application for
waiver due to financial hardship. The Company is considering the
EPA's request.
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.
NOTE 12 - STOCK OPTIONS
Under the Company's 1985 Employee Incentive Stock Option Plan, as
amended, common stock options may be granted to officers and other
key employees for the purchase of up to a total of 580,000 shares
of common stock of the Company at a price per share equal to its
fair market value on the date of grant. Options expire five years
from the date of grant, are contingent upon continued employment
and become exercisable in equal installments during each of the
three years beginning eighteen months after the date of grant.
The following table sets forth the number of shares under option
and the related option prices at September 30, 1999, and 2000:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
<S> <C> <C>
Outstanding at September 30, 1999....................... 113,500 $.50
Canceled............................................ 113,500 $.50
-----------
Outstanding at September 30, 2000....................... -
===========
</TABLE>
At September 30, 2000, no additional options can be granted under
this plan, and the 1985 Employee Incentive Stock Option Plan has
expired.
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, 2000, options to purchase 5,000 shares were
canceled and 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, 2000:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
<S> <C> <C>
Outstanding at September 30, 1999 and 2000.............. 980,000 $.16-- $.22
</TABLE>
As of September 30, 2000, options to purchase 980,000 shares were
outstanding and 909,334 shares are eligible to be exercised at an
average price of $.18 per share under the 1997 Employee Incentive
Stock Option Plan. No additional options can be granted under this
plan.
26
<PAGE>
The 1997 Stock Option Plan was adopted by the Board of Directors
on January 20, 1997, and was approved by the Company's
shareholders on March 11, 1997. This Stock Option Plan provides
for the granting of options to the Company's outside directors for
the purchase of a total of 150,000 shares of common stock of the
Company at a price per share equal to the fair market value on the
date of grant. Options expire five years from the date of grant.
Only nonqualified stock options may be granted under the 1997
Stock Option Plan. The price per share of the shares subject to
each option shall not be less than 100% of the fair market value
of such stock on the date the stock option is granted. Stock
options shall not be exercisable until one and one-half years from
the date of grant. Commencing eighteen (18), thirty (30) and
forty-two (42) months, respectively, after the date of grant, an
option may be exercised to the extent of one third of the total
number of shares to which it relates. Upon a change in control of
the Company (as defined), all stock options granted to any
optionee will become fully exercisable. The 1997 Stock Option Plan
will expire on December 31, 2006.
The following table sets forth the number of shares under option
and the related option price at September 30, 2000:
<TABLE>
<CAPTION>
OPTION PRICE RANGE
NUMBER PER SHARE
<S> <C> <C>
Outstanding at September 30, 1999 and 2000.............. 150,000 $.16
</TABLE>
At September 30, 2000, 150,000 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, 2000.
NOTE 13 - DEFERRED INCOME TAXES
The net deferred tax amounts included in the accompanying balance
sheet contain the following amounts of deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
<S> <C>
Deferred Tax Asset - Current $ 373,000
Deferred Tax Liability - Current -
-----------
373,000
Less Valuation Allowance (373,000)
-----------
Net Deferred Tax Liability - Current $ -
===========
Deferred Tax Asset - Non-Current $ 4,357,000
Deferred Tax Liability - Non-Current -
-----------
4,357,000
Less Valuation Allowance (4,357,000)
-----------
Net Deferred Tax Liability - Current $ -
===========
</TABLE>
The deferred tax asset - current, results from an allowance for
bad debts and inventory reserves, for financial statement purposes
not allowed for income tax purposes.
The deferred tax asset - non-current, results from an estimated
net operating loss carryforward for federal and state income tax
purposes, and from book depreciation and amortization in excess of
tax amounts.
The Company has recorded a valuation allowance to reflect the
estimated amount of deferred asset, which may not be realized. For
the year ended September 30, 2000, valuation allowance increased
by $500,000.
NOTE 14 - INCOME TAXES
As of September 30, 2000, the Company had net operating loss (NOL)
carryforwards of approximately $10,000,000 for Federal and
$3,000,000 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 Federal carryforwards expire from 2005 through
2020; California expires from 2000 through 2005. The Company has
provided an allowance for the entire amount of the deferred asset
applicable to the NOL.
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan (the "Plan")
available to all employees who meet the Plan's eligibility
requirements. Under the Plan, participating employees may defer a
percentage (not to exceed 20%) of their eligible pretax earnings
up to the Internal Revenue Service's annual contribution limit.
Company contributions are not required. To date, the Company has
not made any contributions to the Plan.
27
<PAGE>
NOTE 16 - ACQUISITIONS
On October 1, 1998, the Company purchased certain assets of the
Cheracol(R) cough syrup, Comhist(R) decongestant tablets and
Entuss(R) 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 the highest prime rate in the Wall Street Journal during the
previous month, 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 the highest prime in the Wall
Street Journal during the previous month, commencing January 1,
1999 and ending November 1, 2000. In March, 1999 the buyer and
seller mutually agreed to reduce the purchase price to $666,863
and the monthly payments were adjusted from $3,538 to $2,786. The
maturity date is unchanged.
On December 1, 1998, the Company purchased certain assets of seven
over-the-counter products from Numark Laboratories, Inc. for
$430,000 of which $100,000 was inventory. The Company remitted the
full $430,000 at closing.
On April 23, 1999, the Company purchased certain assets of the
Lady Esther(R) face cream and powder product line from Numark
Laboratories, Inc. for $220,000. The Company remitted $220,000 at
closing. In addition, the Company purchased certain inventory for
$169,000.
On June 29, 1999, the Company purchased certain assets of the
Take-Off(R), premoistened makeup remover cloths product line from
Premier Consumer Products, Inc. and Advanced Polymer Systems, Inc.
for $1,000,000. The Company remitted $200,000 at closing and is
required to make monthly payments of $32,000, plus interest at the
highest prime rate in the Wall Street Journal during the previous
month, commencing September 15, 1999 and ending September 15,
2001. In addition, the Company purchased certain inventory for
approximately $70,000.
On November 15, 1999, the Company purchased certain assets of the
product lines from U.S. Dermatologics, Inc. which includes
Cope(R), a tension headache relief tablet, and Astring-o-Sol(R), a
concentrated mouthwash, for $400,000. The Company has remitted
$200,000 at closing and is required to make twenty-four equal
monthly installments of $8,000, plus interest at a rate equal to
the highest prime rate in the Wall Street Journal during the
preceding month, commencing January 25, 2000 and ending on
December 25, 2001, and a final payment of all remaining principal
due on January 25, 2002. Included in the above purchase price were
certain inventories valued at approximately $60,000.
On January 31, 2000, the Company purchased certain assets of the
product Serutan(R), toasted granules, a bulk-forming laxative, for
$60,000 cash. Included in the purchase price were certain
inventories valued at approximately $6,000.
NOTE 17 - SUBSEQUENT EVENTS (UNAUDITED)
On October 30, 2000, the Company purchased certain assets of the
Sloans(R) liniment temporary pain relief product from C.B. Fleet
Co., Inc. for $50,000 plus less than $10,000 of inventory. The
Company remitted the full $50,000 at closing. The amount of
inventory will be determined at a later date.
On November 27, 2000, the Company renewed one of its subleases in
the amount of $7,280 per month, commencing December 1, 2000, for
twenty-four (24) months.
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
As previously reported in a Current Report on Form 8-K, on June 16, 2000,
the Board of Directors of the Company authorized, effective June 16, 2000, (1)
the termination of engagement of George Brenner, CPA, as independent auditor for
the Company for the fiscal year ended September 30, 2000 and (2) the engagement
of Caldwell, Becker, Dervin, Petrick & Co., 20750 Ventura Boulevard, Suite 140,
Woodland Hills, California 91364, as independent auditors for the Company for
fiscal 2000. Caldwell, Becker, Dervin, Petrick & Co. were engaged as the
Company's principal independent auditors on June 16, 2000.
In connection with its activities for the period October 27, 1995, (the
date George Brenner, CPA, was engaged), through June 16, 2000, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of George Brenner, CPA, would have caused him to
make reference in connection with his report to the subject matter. The opinions
of George Brenner, CPA, with respect to the Company's financial statements did
state that the financial statements were prepared assuming the Company would
continue as a going concern. George Brenner, CPA, was unable to proceed with the
audit engagement because of his failure to obtain the insurance he believed was
necessary.
Prior to such firm's engagement, Caldwell, Becker, Dervin, Petrick & Co.
were not consulted by the Company (or anyone acting on its behalf) regarding (1)
either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements or (2) any matter that was either
the subject of a "disagreement" of a "reportable event" as such terms are
defined in Regulation S-K promulgated by the Securities and Exchange Commission.
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 74 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 48 President, Chairman 1977 President and since April 1995, Chairman of the Board
and Director of the Company
Michael L. Agresti 58 Vice President - 1977 Vice President - Finance, Treasurer and Secretary
Finance, Treasurer and of the Company
Secretary
William M. Caldwell IV 53 Director 1987 President of CAIS Internet, an internet infra-structure
solutions company, and 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.
29
<PAGE>
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 $100,000 for services in all capacities while
acting as officers and directors of the Company during the fiscal years ended
September 30, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- AWARDS
NAME AND OTHER ANNUAL ------------ ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------------------ ---- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Ronald G. Lee 2000 230,241 9,098 (1) -- (2) --
President, Chairman 1999 228,854 3,985 (1) -- (2) --
(since April 26, 1995) 1998 222,574 3,471 (1) 212,000 (2) --
& Director
</TABLE>
(1) Includes reimbursement of medical and dental expenses not covered by the
Company's insurance plan of $9,098, $3,985, and $3,471, respectively, in
2000, 1999, and 1998.
(2) No stock options were granted during fiscal year's 2000 and 1999. The
Company granted 212,000 stock options on January 28, 1998 which had an
option price of $.22 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
NUMBER OF UNEXERCISED OPTIONS
AT FISCAL YEAR END (#)
----------------------
NAME EXERCISABLE/UNEXERCISABLE
---- -------------------------
RONALD G. LEE 709,334/70,660
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the persons who, as of November 30, 2000,
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 2,045,016 shares (1) 42%
1444 Santa Anita Avenue
South El Monte, CA 91733
Common Stock Dr. Henry L. Lee 247,334 shares (1) (2) 6%
1444 Santa Anita Avenue
South El Monte, CA 91733
</TABLE>
(1) Includes shares subject to options exercisable at or within 60 days after
December 31, 2000.
(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.
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 2,045,016 shares (1) 42%
Common Stock Dr. Henry L. Lee 247,334 shares (2) 6%
Common Stock William M. Caldwell IV 75,000 shares (1) 1%
Common Stock All officers and directors
as a group (4 persons) 2,581,886 shares (1) (2) 50%
</TABLE>
(1) Includes shares subject to options exercisable at or within 60 days after
December 31, 2000.
(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.
30
<PAGE>
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 Notes 3 and 8 of Notes to Financial Statements is
incorporated herein by this reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits have been or are being filed
herewith, and are numbered in accordance with Item 601 of Regulation
S-B:
The following exhibits are filed herewith:
10.57 - Promissory note evidencing advance made to the
Registrant
10.58 - Promissory note evidencing advance made to the
Registrant
10.59 - Lease dated May 25, 2000, for the premises located
at 1470 Santa Anita Avenue, South El Monte,
California
10.60 - Lease dated May 25, 2000, for the premises located
at 1425 and 1427 Lidcombe Avenue, South El Monte,
California
10.61 - Lease dated May 25, 2000, for the premises located
at 1434 Santa Anita Avenue, South El Monte,
California
10.62 - Lease dated May 25, 2000, for the premises located
at 1460 Santa Anita Avenue, South El Monte,
California
10.63 - Lease dated May 25, 2000, for the premises located
at 1500 Santa Anita Avenue, South El Monte,
California
10.64 - Lease dated May 25, 2000, for the premises located
at 1516 Santa Anita Avenue, South El Monte,
California
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)
31
<PAGE>
10.17 - Promissory notes which were amended in January 1995
evidencing advances by the Registrant's officers
and directors (10)
10.18 - Promissory notes evidencing advances made by the
Registrant's officers and directors (10)
10.19 - Promissory notes which were amended in July 1995
evidencing advances made to the Registrant (10)
10.20 - Royalty agreement dated August 31, 1994, between
Lee Pharmaceuticals and The Fleetwood Company,
regarding a brand acquisition (10)
10.21 - Royalty agreement dated October 4, 1988, between
Lee Pharmaceuticals and Roberts Proprietaries, Inc.
regarding a brand acquisition (10)
10.22 - Note payable to bank dated April 26, 1996,
between Lee Pharmaceuticals and San Gabriel Valley
Bank, secured by the deed on land and building (11)
10.23 - Loan and security agreement dated May 21, 1996,
between Lee Pharmaceuticals and Preferred Business
Credit, Inc. regarding a revolving credit facility
financing (11)
10.24 - Secured promissory note dated September 17, 1996,
between Lee Pharmaceuticals and Preferred Business
Credit, Inc. (12)
10.25 - Promissory notes evidencing advances made by the
Registrant (12)
10.26 - Promissory notes which were amended in July 1996
evidencing advances made to the Registrant (12)
10.27 - Sublease dated November 22, 1995, for the premises
located at 1460 Santa Anita Avenue, South El Monte,
California (12)
10.28 - Sublease dated June 11, 1996, for the premises
located at 1470 Santa Anita Avenue, South El Monte,
California (12)
10.29 - Lease dated December 1, 1995, for the premises
located at 1444 Santa Anita Avenue, South El Monte,
California (12)
10.30 - Lease dated December 1, 1995, for the premises
located at 1445 Lidcombe Avenue, South El Monte,
California (12)
10.31 - 1997 Employee Incentive Stock Option Plan (13)
10.32 - 1997 Stock Option Plan (13)
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)
10.44 - Asset Purchase and Sale Agreement dated June 29,
1999, between Lee Pharmaceuticals (buyer) and
Premier Consumer Products, Inc. (seller) and
Advanced Polymer Systems, Inc., regarding a brand
acquisition (17)
10.45 Promissory note evidencing advance made to the
Registrant (17)
10.46 Promissory note evidencing advance made to the
Registrant (18)
10.47 Promissory note evidencing advance made to the
Registrant (19)
10.48 Modification of loan and security agreement dated
October 29, 1999, between Lee Pharmaceuticals and
Finova Capital Corporation (formerly Preferred
Business Credit, Inc.) regarding a revolving credit
facility financing (19)
32
<PAGE>
10.49 Modification of secured (by inventory) promissory
note dated October 29, 1999, between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (19)
10.50 Modification of secured (by equipment) promissory
note dated October 29, 1999 ,between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (19)
10.51 Promissory note evidencing advance made to the
Registrant (20)
10.52 Modification of loan and security agreement dated
May 19, 2000, between Lee Pharmaceuticals and
Finova Capital Corporation (formerly Preferred
Business Credit, Inc.) regarding a revolving credit
facility financing (21)
10.53 Modification of secured (by inventory) promissory
note dated May 19, 2000, between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (21)
10.54 Modification of secured (by equipment) promissory
note dated May 19, 2000, between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (21)
10.55 Modification of secured (by Accutek equipment)
promissory note dated May 19, 2000, between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (21)
10.56 Modification of secured (by Accutek equipment)
promissory note dated May 19, 2000 between Lee
Pharmaceuticals and Finova Capital Corporation
(formerly Preferred Business Credit, Inc.) (21)
(1) Filed as an Exhibit of the same number with the Company's
Form S-1 Registration Statement filed with the Securities
and Exchange Commission on February 5, 1973, (Registrant No.
2-47005), and incorporated herein by reference.
(2) Filed as Exhibits 3.4, 3.5 and 13.18 with the Company's Form
10-K Annual Report for the fiscal year ended September 30,
1978, filed with the Securities and Exchange Commission in
December 1978 and incorporated herein by reference.
(3) Filed as an Exhibit of the same number with the Company's
Form 10-K Annual Report for the fiscal year ended September
30, 1979, filed with the Securities and Exchange Commission
in December 1979 and incorporated herein by reference.
(4) Filed as Exhibit 5.1 with the Company's Form 10-K Annual
Report for the fiscal year ended September 30, 1973, filed
with the Securities and Exchange Commission in December 1973
and incorporated herein by reference.
(5) Filed as Exhibits 13.27 and 13.28 with the Company's Form
10-K Annual Report for the fiscal year ended September 30,
1986, filed with the Securities and Exchange Commission in
December 1986 and incorporated herein by reference.
(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.
33
<PAGE>
(15) Filed as Exhibits 10.37 and 10.38 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 10.1, 10.2, 10.3 and 10.4 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.
(17) Filed as Exhibits 10.1 and 10.2 with the Company's Form
10-QSB Quarterly Report for the nine months ended June 30,
1999, filed with the Securities and Exchange Commission in
August 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.46 with the Company's Form 10-KSB Annual
Report for the fiscal year ended September 30, 1999, filed
with the Securities and Exchange Commission in December 1999
and incorporated herein by reference.
(19) Filed as Exhibits 10.1, 10.2, 10.3 and 10.4 with the
Company's Form 10-QSB Quarterly Report for the three months
ended December 31, 1999, filed with the Securities and
Exchange Commission in February 2000 and incorporated herein
by reference.
(20) Filed as Exhibit 10.1 with the Company's Form 10-QSB
Quarterly Report for the six months ended March 31, 2000,
filed with the Securities and Exchange Commission in May
2000 and incorporated herein by reference.
(21) Filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 with the
Company's Form 10-QSB Quarterly Report for the nine months
ended June 30, 2000, filed with the Securities and Exchange
Commission in August 2000 and incorporated herein by
reference.
(b) Reports on Form 8-K:
None
34
<PAGE>
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 15, 2000 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 15, 2000 RONALD G. LEE
---------------------------- -----------------------------------
Ronald G. Lee
Chairman of the Board & President
(Principal Executive, Financial and
Accounting Officer) and Director
Date: DECEMBER 15, 2000 HENRY L. LEE, JR.
---------------------------- -----------------------------------
Henry L. Lee, Jr.
Director
Date: DECEMBER 15, 2000 WILLIAM M. CALDWELL IV
---------------------------- -----------------------------------
William M. Caldwell IV
Director
35
