<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2000
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------ ---------------------------
Commission file number 1-7335
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LEE PHARMACEUTICALS
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-2680312
-------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 SANTA ANITA AVENUE, SOUTH EL MONTE, CALIFORNIA 91733
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(626) 442-3141
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
As of June 30, 2000 there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<S> <C> <C>
Cash $ 5
Accounts and notes receivable (net of allowances: $224) 725
Due from related party 115
Inventories:
Raw materials $1,756
Work in process 248
Finished goods 432
-------
Total inventories 2,436
Other current assets 425
-----
Total current assets 3,706
Property, plant and equipment (less
accumulated depreciation and
amortization: $4,982) 524
Goodwill and other assets (net of
accumulated amortization: $7,336) 3,233
------
TOTAL $7,463
=======
</TABLE>
See notes to financial statements.
<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES
<TABLE>
<S> <C>
Bank overdraft $ 104
Note payable to bank 1,311
Notes payable, other 1,575
Current portion - note payable related party 520
Accounts payable 1,365
Other accrued liabilities 430
Environmental cleanup liability 366
Due to related parties 746
Deferred income 27
------
Total current liabilities 6,444
------
Long-term notes payable to related parties 2,467
------
Long-term notes payable, other 779
------
Environmental cleanup liability - Casmalia Site 374
------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 per value; authorized, 7,500,00 shares;
issued and outstanding, 4,135,162 shares. 413
Additional paid-in capital 4,222
Accumulated deficit (7,236)
------
Total stockholders' equity (2,601)
------
TOTAL $7,463
======
</TABLE>
See notes to financial statements.
<PAGE>
Form 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues $ 2,063 $ 2,034 $ 7,326 $ 6,803
Less: Sales returns (208) (156) (667) (416)
Cash discounts and others (21) (25) (64) (62)
---------- ---------- ---------- ----------
Net revenues 1,834 1,853 6,595 6,325
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 833 775 3,099 2,738
Selling and advertising expense 532 645 1,999 2,184
General and administrative expense 267 348 859 995
Interest expense 208 173 647 547
---------- ---------- ---------- ----------
Total costs and expenses 1,840 1,941 6,604 6,464
---------- ---------- ---------- ----------
Loss from operations (6) (88) (9) (139)
Other income 17 28 48 62
---------- ---------- ---------- ----------
Net income (loss) before extraordinary item 11 (60) 39 (77)
Extraordinary loss related to Casmalia
Disposal Site Cleanup - - - (374)
---------- ---------- ---------- ----------
Net income (loss) $ 11 $ (60) $ 39 $ (451)
========== ========== ========== ==========
Per share:
Net income (loss) per share before
extraordinary loss $ .00 $ (.01) $ .01 $ (.02)
Extraordinary loss - - - (.09)
---------- ---------- ---------- -----------
Net income (loss) $ .00 $ (.01) $ .01 $ (.11)
========== =========== ========== ============
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
2000 1999
---------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 39 $ (451)
Loss from extraordinary item............................................. - 374
------------- -------------
Net income (loss) before extraordinary item................................ 39 (77)
------------- -------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation............................................................... 114 102
Amortization of intangibles................................................ 664 640
(Decrease) in deferred income.............................................. (48) (49)
(Gain) on disposal of property, plant, and equipment....................... (1) (13)
Change in operating assets and liabilities:
Decrease in accounts receivable............................................ 168 418
Decrease (increase ) in due from related party............................. 39 (167)
(Increase) in inventories ................................................. (105) (319)
Decrease in other current assets........................................... 29 42
Increase in accounts payable............................................... 276 166
Increase in accounts payable related party................................. 76 91
Increase in accrued liabilities-environmental cleanup...................... - 76
(Decrease) increase in other accrued liabilities........................... (242) 159
(Decrease) in accrued royalties............................................ (3) (363)
------------- -------------
Total adjustments.......................................................... 967 783
------------- -------------
Net cash provided by operating activities................................ 1,006 706
------------- -------------
Cash flows from investing activities:
Additions to property, plant, and equipment................................ (219) (57)
Proceeds from sale of equipment............................................ 1 13
Acquisitions of product brands............................................. (194) (1,350)
------------- -------------
Net cash (used in) investing activities.................................. (412) (1,394)
------------- -------------
Cash flows from financing activities:
(Payments on) bank loans................................................... (18) (22)
(Payments on) notes payable to related party............................... (4) (14)
(Payments on) proceeds from notes payable, other........................... (583) 636
Increase in bank overdraft................................................. 12 50
------------- -------------
Net cash (used in) provided by financing activities...................... (593) 650
------------- -------------
Net increase (decrease) in cash............................................... 1 (38)
Cash, beginning of year....................................................... 4 42
------------- -------------
Cash end of period............................................................ $ 5 $ 4
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................... $ 538 $ 461
============= =============
Acquisitions of product brands:
Fair value of assets acquired.............................................. $ 394 $ 2,217
Fair value of liabilities incurred......................................... (200) (867)
------------- -------------
Net cash payments........................................................ $ 194 $ 1,350
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The condensed interim financial statements included herein have been
prepared by Lee Pharmaceuticals without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained herein. It is suggested that
these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1999. The Company
follows the same accounting policies in preparation of interim reports.
Results of operations for the interim periods may not be indicative of
annual results.
The Company is involved in various matters involving environmental cleanup
issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
Operations" and Note 10 of Notes to Financial Statements included in the
Company's Form 10-KSB for the fiscal year ended September 30, 1999. The
ultimate outcome of these matters cannot presently be determined.
Environmental expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or cleanups are
probable, and the costs can be reasonably estimated.
2. Continued existence:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's past recurring
losses and fiscal 1977's nominal profit from operations, fiscal 2000's
nominal net income and inability to generate sufficient cash flow from
normal operations to meet its obligations as they became due, raises
substantial doubt about its ability to continue as a going concern. 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.
3. Basic income (loss) per share:
Basic income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the periods presented. Common
stock equivalents (common stock options) are not included in the
calculation for the three months ended June 30, 2000 because the effect was
immaterial. Common stock equivalents were not included in the profit for
the three months ended June 30, 2000 because their effect on basic income
per share is anti-dilutive. The weighted average number of shares was
4,135,162 for all periods presented.
4. Note payable, other:
Effective April 26, 1996, the Company renewed its real estate loan with the
bank. The note payable to the bank, secured by deed on land and building,
requires a monthly payment of $4,200 including interest at the bank's
reference rate plus 4%, maturing March 2001. At June 30, 2000, the interest
rate was 13.5%. The note is guaranteed by the former Chairman of the
Company and the Company's President.
5. Note payable to bank:
Effective May 19, 2000, the Company renewed its accounts receivable
financing, maturing May 2002, whereby 75% of the eligible domestic accounts
receivable, not to exceed $1,400,000 less amounts
<PAGE>
FORM 10-QSB
loaned on inventory, not to exceed $400,000, can be advanced. The agreement
is renewable for successive two-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 term loan on inventory, which is incorporated in the working
capital line of credit above. This term loan requires monthly payments of
$11,110 with an interest rate of 6% above Bank of America's prime rate.
Additionally, there is a separate $506,000 term loan on the Company's
equipment. The financing is secured by a security interest in all of the
Company's assets and requires monthly payments of $15,400 plus interest at
Bank of America's prime rate plus 6%. The continuing personal guarantee by
the Company's President, of the obligations of the Company, remains in
force.
On October 29, 1999, the Company and it's asset based financing lender
mutually agreed to modify the Loan and Security Agreement whereby the
maximum revolving advance was increased to $1,400,000 from $1,100,000 based
on domestic accounts receivable and inventory. All other terms and
conditions of the Agreement remain unchanged.
6. Acquisition:
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 prime, commencing January 1, 1999, and
ending November 1, 2000. In addition, the Company purchased certain
inventory for $150,800 for which the Company is required to make monthly
payments of $6,283, plus interest at prime, commencing January 1, 1999, and
ending November 1, 2000. By mutual consent, the buyer and seller, in March,
1999 reduced 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), facial 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),
pre-moistened 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 prime 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 (published 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 was 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 was certain inventories valued at
approximately $6,000.
7. Related party transactions:
In January 2000, non-cash transactions were recorded whereby $115,000 in
prior cash advances to related parties were prepaid and offset against
long-term notes of the same amount, due to the same related parties.
<PAGE>
FORM 10-QSB
In March 1999 a non-cash transaction was recorded whereby $193,000 in prior
cash advances, to a related party, was prepaid and offset against a
long-term note, of the same amount, due to the same related party.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000, AND JUNE 30, 1999
Gross revenues for the three months ended June 30, 2000, were $2,063,000,
an increase of approximately $29,000 or 1% from the comparable three months
ended June 30, 1999. The increase in gross revenues was due to the added
sales volume of the Lee(R) Lip-Ex(TM) line of products ($343,000) and the
newly acquired brands (approximately $229,000). The increase was offset by
declining sales volume of existing brands such as the depilatories
($231,000), Aquafilter(R) ($48,000) and other over-the-counter items
($223,000).
Net revenues decreased approximately $19,000 or 1% for the three months
ended June 30, 2000, as compared to the three months ended June 30, 1999.
The change in net revenues was due to the same sales volume explanations
discussed above as well as the increased sales returns discussed below. The
Company's sales returns increased approximately $52,000 or 33% when
comparing fiscal years 2000 and 1999 due to an increase in the allowance
for sales returns along with higher returns of several over-the-counter
drug items.
Cost of sales as a percentage of gross revenues were 40% for the three
months ended June 30, 2000, compared to 38% for the three months ended June
30, 1999. The higher cost of sales percentage was due to an increase
($129,000) in the Company's raw material purchases. In addition, direct
labor and temporary help costs increased by $18,000 and the Company's
depreciation expense was higher ($10,000) because new equipment was
acquired.
Selling and advertising expenses decreased $113,000 or 18% when comparing
the three months ended June 30, 2000, with the three months ended June 30,
1999. The decrease in expenses was mainly due to the following factors; 1)
finalization of several royalty commitments related to prior brand
acquisitions ($54,000), 2) lower set-up charges associated with redesigned
product packaging labels ($17,000), 3) reduction in media print and media
television advertising ($15,000), 4) lower products liability insurance
costs due to fewer claims ($14,000), and 5) reduction in consulting
services ($11,000). The above decreases were offset by increases in
amortization expense ($30,000), the result of recent brand acquisitions.
General and administrative expenses decreased $81,000 or 23% when comparing
the three months ended June 30, 2000, with the three months ended June 30,
1999. The decrease in expenses was mainly due to the following factors; 1)
lower management information systems (MIS) consulting services related to
electronic data interchange (EDI) and Year 2000 readiness ($29,000), 2)
reduced travel and entertainment expenses ($24,000), and 3) a reduction in
temporary help expenses ($7,000).
Interest expense increased $35,000 or 20% when comparing the three months
ended June 30, 2000, with the three months ended June 30, 1999. The
increase was due to increased borrowings from the Company's asset based
financing lender, additional liability commitments as a result of recent
brand acquisitions, higher private borrowings at a higher interest rate and
a higher prime interest rate related to certain borrowings which are tied
to prime.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000, AND JUNE 30, 1999
Gross revenues for the nine months ended June 30, 2000, were $7,326,000 an
increase of approximately $523,000 or 8% from the comparable nine months
ended June 30, 1999. The increase in gross revenues was due to the sales
revenues generated from the newly acquired brands such as; Cope(R),
Astring-o-Sol(R), Lady Esther(R), Serutan(R), and Take-Off(R) ($841,000)
plus an increase
<PAGE>
FORM 10-QSB
in the Lee(R) Lip-Ex(TM) line of products ($740,000). The increased sales
volume was partially offset by the lower sales revenues generated from the
depilatory category, several over-the-counter items, and the continued
decline of the nail extender category of products.
Net revenues for the nine months ended June 30, 2000 were $6,595,000 an
increase of $270,000 or 4% from the comparable nine months ended June 30,
1999. The change in net revenues was due to the same explanations discussed
above. The Company's sales returns were higher ($667,000 in fiscal 2000
versus $416,000 in fiscal 1999). The excessive sales return volume was the
result of the discontinuance of one of the Company's SKU's (stock keeping
unit) at the retail store level; 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).
Cost of sales as a percentage of gross revenues for the nine months ended
June 30, 2000, as compared to the nine months ended June 30, 1999, was 42%
versus 40% respectively. The higher cost of sales percentage was due to an
increase in the Company's inventory obsolescence reserve ($80,000).
Selling and advertising expenses decreased $185,000 or 9% when comparing
the nine months ended June 30, 2000, with the nine months ended June 30,
1999. The decreased expenses were basically due to; 1) finalization of
several royalty commitments related to prior brand acquisitions ($149,000),
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 ($46,000), 4)
lower consulting services ($28,000), lower set-up charges associated with
redesigned product packaging labels ($22,000), and 5) reduced convention
costs due to the fact that fewer shows were attended ($8,000). The above
decreases were offset by increases in; 1) amortization expenses ($96,000)
the result of recent brand acquisitions, 2) an accrual of bad debt expense
($30,000), and 3) higher freight costs ($58,000).
General and administrative expenses decreased $136,000 or 14% when
comparing the nine months ended June 30, 2000, with the nine months ended
June 30, 1999. The decrease was principally due to the same factors as
listed when comparing the three months ended June 30, 2000, versus the
comparable period ended June 30, 1999.
Interest expense increased $100,000 or 18% when comparing the nine months
ended June 30, 2000, with the nine months ended June 30, 1999. The increase
was due to the explanations outlined above when comparing the three months
ended June 30, 2000 versus the comparable period ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, working capital was a negative $2,738,000 compared with a
negative $2,409,000 as of September 30, 1999. The ratio of current assets
to current liabilities was .6 to 1 at June 30, 2000, and September 30,
1999. The increase in the Company's negative working capital was primarily
due to increases in the current portion of notes payable - other (a result
of increased private borrowings and a new note regarding a recent brand
acquisition) and accounts payable along with decreases in accounts
receivable.
The Company has an accumulated deficit of $7,236,000. The Company's past
recurring losses and fiscal 1997's nominal profit from operations, fiscal
2000's nominal net income and inability to generate sufficient cash flow
from normal operations to meet its obligations as they became due, raises
substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue in existence is dependent upon
future developments, including retaining current financing and achieving a
level of profitable operations sufficient to enable it to meet its
obligations as they become due.
YEAR 2000 READINESS
Based on currently available information, management does not believe that
the Year 2000 computer matters will have a material adverse impact on the
Company's financial condition or results of operations.
<PAGE>
Form 10-QSB
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The "RWQCB")
ordered the Company in 1988 and 1989 to investigate the contamination on its
property (relating to soil and groundwater contamination). The Company
engaged a consultant who performed tests and reported to the then Chairman of
the Company. The Company resisted further work on its property until the
property upgradient was tested in greater detail since two "apparent source"
lots had not been tested. On August 12, 1991, the RWQCB issued a "Cleanup and
Abatement Order" directing the Company to conduct further testing and cleanup
the site. In October 1991, the Company received from an environmental
consulting firm an estimate of $465,200 for investigation and cleanup costs.
The Company believed that this estimate was inconclusive and overstated the
contamination levels. The Company believes that subsequent investigations
will support the Company's conclusions about that estimate. The Company did
not complete the testing for the reasons listed above as well as "financial
constraints". In June 1992 the RWQCB requested that the EPA evaluate the
contamination and take appropriate action. At the EPA's request, Ecology &
Environment, Inc. conducted an investigation of soil and groundwater on the
Company's property. Ecology & Environment Inc.'s Final Site Assessment
Report, which was submitted to the EPA in June 1994, did not rule out the
possibility that some of the contamination originated on-site, and resulted
from either past or current operations on the property. The Company may be
liable for all or part of the costs of remediating the contamination on its
property. The EPA has not taken any further action in this matter, but may do
so in the future.
The Company and nearby property owners, in consort with their comprehensive
general liability (CGL) carriers, have engaged a consultant to perform a site
investigation with respect to soil and shallow groundwater contamination over
the entire city block. The CGL carriers provided $290,000 in funding which
paid for the $220,000 study, $20,000 in legal fees for project oversight, and
a $50,000 balance in the operating fund. Earlier the Company had accrued
$87,500 as its proportionate share of the earlier quote of $175,000. Since
that time, the overall scope of the project was increased to $205,000 plus
$15,000 for waste water disposal, bringing the total to the above listed
$220,000. The $87,500 accrual was not spent on this project (as the entire
cost was borne by the CGL carriers), but remains on the books as an accrual
against the cost of remediation of the same site that was included in the
study.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination on
the properties leased by the tenants. The case name is DEL RAY INDUSTRIAL
ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los Angeles County Superior
Court, Northwest District, commenced August 21, 1991. In this action, the
plaintiff alleges environmental contamination by defendants of its property,
and seeks a court order preventing further contamination and monetary
damages. The Company does not believe there is any basis for the allegations
and is vigorously defending the lawsuit.
The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater, which is part of
the San Gabriel Valley Superfund site. The Company has been notified that it
is a potentially responsible party ("PRP") for the contamination. In 1995,
the Company was informed that the EPA estimated the cleanup costs for the
South El Monte's portion of the San Gabriel Valley Superfund site to be $30
million. The Company's potential share of such amount has not been
determined. Superfund PRPs are jointly and severally liable for superfund
site costs, and are responsible for negotiating among themselves the
allocation of the costs based on, among other things, the outcome of
environmental investigation.
In August 1995 the Company was informed that the EPA entered into an
Administrative Order of Consent with Cardinal Industrial Finishes
("Cardinal") for a PRP lead remedial investigation and feasibility study (the
"Study") which, the EPA states, will both characterize the extent of
groundwater contamination in South El Monte and analyze alternatives to
control the spread of contamination. The Company and others have entered into
the South El Monte Operable Unit Site Participation Agreement with Cardinal
pursuant to which, among other things, Cardinal will contract with an
environmental firm to conduct the Study. The Study has been completed. The
Company's share of the cost of the Study is currently $15,000 and was accrued
for in the financial statements as of September 30, 1995. The 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 of 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
<PAGE>
Form 10-QSB
$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 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.
The City of South El Monte, the city in which the Company has its
manufacturing facility, is located in the San Gabriel Valley. The San Gabriel
Valley has been declared a Superfund site. The 1995 Water Quality Control
Plan issued by the California Regional Water Quality Control Board states
that the primary groundwater basin pollutants in the San Gabriel Valley are
volatile organic compounds from industry, nitrates from subsurface sewage
disposal and past agricultural activities. In addition, the Plan noted that
hundreds of underground storage tanks leaking gasoline and other toxic
chemicals have existed in the San Gabriel Valley. The California Department
of Toxic Substance Control have declared large areas of the San Gabriel
Valley to be environmentally hazardous and subject to cleanup work.
The Company believes the City of South El Monte does not appear to be located
over any of the major plumes. However, the EPA recently announced it is
studying the possibility that, although the vadose soil and groundwater,
while presenting cleanup problems, there may be a contamination by DNAPs
(dense non-aqueous phase liquids), i.e., "sinkers", usually chlorinated
organic cleaning solvents. The EPA has proposed to drill six "deep wells"
throughout the City of South El Monte at an estimated cost of $1,400,000. The
EPA is conferring with SEMPOA (South El Monte Property Owners Association) as
to cost sharing on this project. SEMPOA has obtained much lower preliminary
cost estimates. The outcome cost and exact scope of this are unclear at this
time.
The Company and other property owners engaged Geomatrix Consultants, Inc., to
do a survey of vadose soil and shallow groundwater in the "hot spots"
detected in the previous studies. Geomatrix issued a report dated December 1,
1997 (the "Report"), on the impact of volatile organic compounds on the soil
and groundwater at the Lidcombe and Santa Anita Avenue site located in South
El Monte, California (which includes the Company's facilities). The Report
indicated generally low concentrations of tetrachloroethene , trichloaethene
and trichloroethane in the groundwater of the upgradient neighbor. The Report
was submitted to the RWQCB for its comments and response. A meeting with the
parties and RWQCB was held on February 10, 1998. The RWQCB had advised
companies that vadose soil contamination is minimal and requires no further
action. However, there is an area of shallow groundwater which has a higher
than desired level of chlorinated solvents, and the RWQCB requested a
proposed work plan be submitted by Geomatrix. Geomatrix has submitted a
"Focused Feasibility Study" which concludes that there are five possible
methods for cleanup. The most expensive are for a pump and sewer remediation
which would cost between $1,406,000 and $1,687,000. The Company is actively
exploring the less expensive alternative remediation methods, of which the
two proposed alternatives range in cost between $985,000 and $1,284,000.
Accordingly, the Company has taken the average of the two amounts ($985,000
and $1,284,000) as the total amount of estimated cost. Since there are four
economic entities involved, the Company's best estimate was that its
forecasted share would be 25% or $284,000 less the liability already
recognized on the books of $162,000 thereby requiring an additional $122,000
liability. Accordingly,
<PAGE>
Form 10-QSB
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 as discussed below is not included in the $284,000 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
$284,000 (which includes the $122,000 charge to income in the third quarter
of fiscal 1998).
Without any prior correspondence or inkling of the Company's potential
liability, the EPA has recently informed the Company that the Company may
have potential liability for the ongoing remediation of Operating Industries,
Inc. (as they have gone out of business) Landfill Superfund Site in Monterey
Park, California (the "Monterey Site"). The Monterey Site is a 190-acre
landfill that operated from 1948 to 1984, in which the Company disposed of
non-toxic pH balanced waste water on six occasions between 1974 and 1978.
Over 4,000 companies have been identified as having contributed waste to the
Monterey Site. The EPA 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 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 recently notified by the EPA that the Company may have
potential liability for waste material it disposed of at the Casmalia
Disposal Site ("Site") located on a 252-acre parcel in Santa Barbara County,
California. The Site was operational from 1973 to 1989 and over 10,000
separate parties disposed of waste there. The EPA stated that federal, state
and local governmental agencies along with the numerous private entities that
used the Site for waste disposal will be expected to pay their share as part
of this settlement. The U.S. EPA is also pursuing the owner(s)/operator(s) of
the Site to pay for Site remediation. The EPA has a settlement offer to the
Company with respect to the Site for a cost of $373,950. The Company accrued
a $374,000 charge in the first quarter of fiscal 1999 with respect to this
possible liability. The Company has elected to file for relief from these
obligations under the financial hardship 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 wavier, 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 wavier 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.
<PAGE>
Form 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations - Environmental Matters" is incorporated herein
by reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1999.
Item 6. The following exhibits are filed herewith:
10.1 - 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
10.2 - Modification of secured (by inventory) promissory note
dated May 19, 2000, between Lee Pharmaceuticals and Finova
Capital Corporation (formerly Preferred Business Credit,
Inc.)
10.3 - Modification of secured (by equipment) promissory note
dated May 19, 2000, between Lee Pharmaceuticals and Finova
Capital Corporation (formerly Preferred Business Credit,
Inc.)
10.4 - Modification of secured (by Accutek equipment) promissory
note dated May 19, 2000, between Lee Pharmaceuticals and
Finova Capital Corporation (formerly Preferred Business
Credit, Inc.)
10.5 - Modification of secured (by Accutek equipment) promissory
note dated May 19, 2000, between Lee Pharmaceuticals and
Finova Capital Corporation (formerly Preferred Business
Credit, Inc.)
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, 1997 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to By-laws effective November 1, 1980 (3)
(1) Filed as an Exhibit of the same number with the Company's Form
S-1 Registration Statement filed with the Securities and Exchange
Commission on February 5, 1973, (Registrant No. 2-47005), and
incorporated herein by reference.
(2) Filed as Exhibits 3.4 and 3.5 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1978, filed
with the Securities and Exchange Commission and incorporated herein
by reference.
(3) Filed as an Exhibit of the same number with the Company's Form
10-K Annual Report for the fiscal year ended September 30, 1979,
filed with the Securities and Exchange Commission and incorporated
herein by reference.
<PAGE>
Form 10-QSB
SIGNATURES
In accordance with the requirements of the Securities Exchange Acts of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEE PHARMACEUTICALS
------------------------------
(Registrant)
Date: AUGUST 11, 2000 RONALD G. LEE
-------------------- ------------------------------
Ronald G. Lee
Chairman of the Board, President
and Chief Financial and
Accounting Officer
