<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2000
------------------------------------------------
OR
[ ] TRANSITION REPORT UNDER 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 March 31, 2000 there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Cash $ 4
Accounts and notes receivable (net of allowances: $308) 923
Due from related party 61
Inventories:
Raw materials $ 1,877
Work in process 178
Finished goods 438
-------------
Total inventories 2,493
Other current assets 656
-------------
Total current assets 4,137
Property, plant and equipment (less
accumulated depreciation and
amortization: $4,943) 506
Goodwill and other assets (net of
accumulated amortization: $7,117) 3,452
-------------
TOTAL $ 8,095
=============
</TABLE>
See notes to financial statements.
2
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Bank overdraft $ 179
Note payable to bank 1,545
Current portion - notes payable, other 1,575
Current portion - note payable related party 490
Accounts payable 1,277
Other accrued liabilities 772
Environmental cleanup liability 366
Due to related parties 690
Deferred income 44
---------------
Total current liabilities 6,938
---------------
Long-term notes payable to related parties 2,501
---------------
Long-term notes payable, other 895
---------------
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 (7,248)
---------------
Total stockholders' equity (2,613)
---------------
TOTAL $ 8,095
===============
</TABLE>
See notes to financial statements.
3
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues $ 2,726 $ 2,636 $ 5,263 $ 4,769
Less: Sales returns (266) (133) (459) (260)
Cash discounts and others (21) (21) (43) (37)
----------- ----------- ----------- -----------
Net revenues 2,439 2,482 4,761 4,472
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,198 1,027 2,266 1,963
Selling and advertising expense 735 820 1,467 1,539
General and administrative expense 287 344 592 647
Interest expense 223 186 439 374
----------- ----------- ----------- -----------
Total costs and expenses 2,443 2,377 4,764 4,523
----------- ----------- ----------- -----------
(Loss) income from operations (4) 105 (3) (51)
Other income 14 19 31 34
----------- ----------- ----------- -----------
Net income (loss) before extraordinary
item 10 124 28 (17)
Extraordinary loss related to Casmalia
Disposal Site cleanup - - - (374)
----------- ----------- ----------- -----------
Net income (loss) $ 10 $ 124 $ 28 $ (391)
=========== =========== =========== ===========
Per share:
Net income (loss) per share before
extraordinary loss $ .00 $ .03 $ .01 $.00
Extraordinary loss .00 .00 .00 (.09)
----------- ----------- ----------- -----------
Net income (loss) $ .00 $ .03 $ .01 $ (.09)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
2000 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 28 $ (391)
Loss from extraordinary item............................................. - 374
------------- -------------
Net income (loss) before extraordinary item................................ 28 (17)
------------- -------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation............................................................... 74 67
Amortization of intangables................................................ 445 423
(Decrease) in deferred income.............................................. (33) (33)
Loss (gain) on disposal of property, plant, and equipment.................. 1 (2)
Change in operating assets and liabilities:
(Increase) in accounts receivable.......................................... (30) (261)
Decrease (increase) in due from related party.............................. 93 (45)
(Increase) in inventories ................................................. (162) (125)
(Increase) decrease in other current assets................................ (202) 91
Increase in accounts payable............................................... 188 285
Increase due to related party.............................................. 20 51
Increase in notes payable, other........................................... 122 712
Increase in other accrued liabilities...................................... 78 118
Increase (decrease) in accrued royalities.................................. 12 (329)
------------- -------------
Total adjustments.......................................................... 606 952
------------- -------------
Net cash provided by operating activities................................ 634 935
------------- -------------
Cash flows from investing activities:
Additions to property, plant, and equipment................................ (155) (49)
Proceeds from sale of equipment............................................ 1 2
Acquisitions of product brands............................................. (194) (930)
------------- -------------
Net cash (used in) investing activities.................................. (348) (977)
------------- -------------
Cash flows from financing activities:
(Payments on) bank loans................................................... (12) (12)
(Payments on) notes payable to related party............................... - (2)
(Payments on) proceeds from notes payable, other........................... (361) 73
Increase (decrease) in bank overdraft...................................... 87 (54)
------------- -------------
Net cash (used in) provided by financing activities...................... (286) 5
------------- -------------
Net increase (decrease) in cash............................................... 0 (37)
Cash, beginning of year....................................................... 4 42
------------- -------------
Cash end of period............................................................ $ 4 $ 5
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................... $ 366 $ 309
============= =============
Acquisitions of product brands:
Fair value of assets acquired.............................................. $ 394 $ 997
Fair value of liabilities incurred......................................... (200) (67)
------------- -------------
Net cash payments........................................................ $ 194 $ 930
============= =============
</TABLE>
See notes to financial statements.
5
<PAGE>
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of March 31, 2000, and the statements of
operations and cash flows for the periods ended March 31, 2000, and 1999,
have not been audited by independent accountants but reflect all
adjustments, consisting of any normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results for
such periods. The results of operations for the six months ended March 31,
2000, are not necessarily indicative of results to be expected for the year
ending September 30, 2000.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these financial statements are adequate to make the information
not misleading.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1999.
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. 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 March 31, 2000 because the effect
was immaterial. Common stock equivalents were not included in the profit
for the three months ended March 31, 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.
3. Note payable to bank:
Effective April 26, 1996, the Company renewed its real estate loan with the
bank. The note payable to the bank, secured by deed on land and building,
requires a monthly payment of $4,200 including interest at the bank's
reference rate plus 4%, maturing March 2001. At March 31, 2000, the
interest rate was 13%. The note is guaranteed by the former Chairman of the
Company and the Company's President.
4. Line of credit:
Effective May 21, 1998, the Company renewed its accounts receivable
financing, maturing May 2000, whereby 75% of the eligible domestic accounts
receivable, not to exceed the greater of $1,100,000 or $1,100,000 less
amounts advanced on inventory can be advanced. The agreement 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 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 $536,000 term loan on the Company's equipment. This financing
is secured by a security interest in all of the Company's assets and
requires monthly payments of $15,400 including interest at Bank of
America's prime rate plus 6%.
6
<PAGE>
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. All other terms and conditions of the
Agreement remain unchanged.
5. Acquisitions:
On October 1, 1998, the Company purchased certain assets of the
Cheracol-Registered Trademark- cough syrup, Comhist-Registered Trademark-
decongestant tablets and Entuss-Registered Trademark- expectorant product
lines from Roberts Pharmaceutical Corporation for $684,934. The Company
remitted $600,000 at closing and is required to make monthly payments of
$3,538, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. In addition, the Company purchased certain inventory for
$150,800 for which the Company is required to make monthly payments of
$6,283, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. 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-Registered Trademark-, 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-Registered Trademark-, 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 product lines
from U.S. Dermatologics, Inc. which includes Cope-Registered Trademark-, a
tension headache relief tablet, and Astring-o-Sol-Registered Trademark-, 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
line Serutan-Registered Trademark-, toasted granules, a bulk-forming
laxative, for $60,000 cash. Included in the purchase price was certain
inventories valued at approximately $6,000.
6. 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.
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.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, AND MARCH 31, 1999
Gross revenues for the three months ended March 31, 2000, were $2,726,000,
an increase of approximately $90,000 or 3% from the comparable three months
ended March 31, 1999. The increase in gross revenues was due to the new
volume generated from the newly acquired brands such as; Cope-Registered
Trademark-, Astring-o-Sol-Registered Trademark-, Lady Esther-Registered
Trademark-, and Take-Off-Registered Trademark-. The newly acquired brands
accounted for approximately $260,000 of the $461,000 increase. The Company
also had increases in the Lee-Registered Trademark- Lip-Ex-TM- line of
products. This increase was offset by reductions in the nail extender
category ($98,000), depilatories ($25,000), Aquafilter-Registered
Trademark- ($48,000), Klutch-Registered Trademark- ($34,000) and other
over-the-counter items ($156,000).
Net revenues decreased approximately $43,000 or 2% for the three months
ended March 31, 2000, as compared to the three months ended March 31, 1999.
The change in net revenues was due to the same explanations discussed
above. The Company's sales returns increased approximately $133,000 or 100%
when comparing fiscal years 2000 and 1999, due to the discontinuance of one
of the Company's SKU's (stock keeping unit) at the retail store level, and
the recall of a distributed item manufactured by one of the Company's
co-packer.
Cost of sales as a percentage of gross revenues was 44% for the three
months ended March 31, 2000 compared to 39% for the comparative three
months period ended March 31, 1999. The higher cost of sales percentage was
due to increases in the Company's allowance for sales returns ($123,000)
and inventory obsolescence reserve ($80,000).
Selling and advertising expenses decreased $85,000 or 10% when comparing
the three months ended March 31, 2000, with the three months ended March
31, 1999. The decrease in expenses was mainly due to the following factors;
1) lower salesmen salaries plus related fringe benefits because of two
fewer outside sales personnel ($33,000), 2) reduction in media print and
media television advertising ($29,000), 3) finalization of several royalty
commitments related to prior brand acquisitions ($97,000), 4) reduced
convention costs because fewer shows were attended ($13,000), and a
non-recurring warehouse allowance to a key customer during March 31, 1999
($8,000). The above decreases were offset by increases in; 1) cooperative
advertising expense ($40,000), 2) amortization expense ($33,000) the result
of recent brand acquisitions, and 3) an accrual for bad debt expense
($30,000).
General and administrative expenses decreased $57,000 or 17% when comparing
the three months ended March 31, 2000, with the three months ended March
31, 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 ($47,000), 2)
reduced legal expenses ($13,000), and 3) a reduction in temporary help
expense ($5,000). The decreases were partially offset by an increase in
salaries and wages plus fringe benefits due to a new hire and a number of
annual salary increases.
Interest expense increased $37,000 or 20% when comparing the three months
ended March 31, 2000, with the three months ended March 31, 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
SIX MONTHS ENDED MARCH 31, 2000, AND MARCH 31, 1999
Gross revenues for the six months ended March 31, 2000, were $5,263,000, an
increase of approximately $494,000 or 10% from the comparable six months
ended March 31, 1999. The increase in gross revenues was due to the sales
revenues generated from the newly acquired brands such as; Cope-Registered
Trademark-, Astring-o-Sol-Registered Trademark-, Lady Esther-Registered
Trademark-, and Take-Off-Registered Trademark- plus an increase in the
Lee-Registered Trademark- Lip-Ex-TM- line of products. The increased sales
volume was partially offset by the lower sales revenues generated from the
depilatory category, several over-the-counter items, and the nail extender
category of products.
8
<PAGE>
Net revenues for the six months ended March 31, 2000 were $4,761,000, an
increase of $289,000 from the comparable six months ended March 31, 1999.
The higher sales volume was attributed to the newly acquired brands, namely
Cope-Registered Trademark-, Astring-o-Sol-Registered Trademark-, Lady
Esther-Registered Trademark-, and Take-Off-Registered Trademark- plus an
increase in the Lee-Registered Trademark- Lip-Ex-TM- line of products. The
increased sales volume was partially offset by the lower sales revenues
generated from the depilatory category, several over-the-counter items, and
the nail extender category of products. Also, the Company's sales returns
were higher ($459,000 in fiscal 2000 versus $260,000 in fiscal 1999) than
expected. The excessive sales return volume was the result of the
discontinuance of one of the Company's SKU's at the retail store level plus
the recall of a distributed product manufactured by one of the Company's
co-packer.
Cost of sales as a percentage of gross revenues for the six months ended
March 31, 2000, as compared to the six months ended March 31, 1999, was 43%
versus 41% respectively. The higher cost of sales percentage was due to
increases in the Company's allowance for sales returns ($123,000) and
inventory obsolescence reserve ($80,000).
Selling and advertising expenses decreased $72,000 or 5% when comparing the
six months ended March 31, 2000, with the six months ended March 31, 1999.
The decreased expenses were basically due to; 1) lower salesmen salaries
plus related fringe benefits the result of two fewer outside sales
personnel ($40,000), 2) reduction in media print and television advertising
($46,000), 3) finalization of several royalty commitments related to prior
brand acquisitions ($169,000), 4) reduced convention costs due to the fact
that fewer shows were attended ($13,000), and a non-recurring warehouse
allowance extended to a key customer during March 1999 ($8,000). The above
decreases were offset by increases in; 1) cooperative advertising expense
($89,000), 2) amortization expense ($66,000) the result of recent brand
acquisitions, 3) higher freight costs ($56,000), and 4) an accrual of bad
debt expense ($30,000).
General and administrative expenses decreased $55,000 or 9% when comparing
the six months ended March 31, 2000, with the six months ended March 31,
1999. This decrease was principally due to the same factors outlined above
when comparing the three months ended March 31, 2000, versus the comparable
period ended March 31, 1999.
Interest expense increased $65,000 or 17% when comparing the six months
ended March 31, 2000, with the six months ended March 31, 1999. The
increase was due to the explanations outlined above when comparing the
three months ended March 31, 2000 versus the comparable period ended March
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, working capital was a negative $2,801,000 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 March 31, 2000, and September 30,
1999. The increase in the Company's negative working capital was basically
due to a decrease in other current assets and increases in notes payable to
bank.
The Company has an accumulated deficit of $7,248,000. The Company's past
recurring losses and fiscal 2000's nominal net income and inability to
generate sufficient cash flow from normal operations to meet its
obligations as they come due (has in past independent auditor's reports)
raised substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue in existence is dependent upon
future developments, including retaining current financing and achieving a
level of profitable operations sufficient to enable it to meet its
obligations as they become due.
YEAR 2000 READINESS
Most companies have computer systems that use two digits to identify a year
in the date field (e.g. "99" for 1999). These systems must be modified to
handle turn-of-the century calculations. If not corrected, systems failures
or miscalculations could occur, potentially causing disruptions of
operations, including, among other things, the inability to process
transactions, send invoices, or engage in other normal business activities.
This creates potential risk for all companies, even if their own computer
systems are Year 2000 compliant.
9
<PAGE>
In 1998, the Company initiated a comprehensive review of its computer
systems to identify processes that could be adversely affected by Year 2000
issues. In addition, the Company identified computer application systems
that required modification or replacement. The Company communicated with
suppliers, vendors, and lenders to determine the extent to which those
companies are addressing Year 2000 compliance issues.
The Company currently estimates that the total cost for the Year 2000
project will be approximately $100,000. During fiscal year 1999, the
Company incurred approximately $73,000 for charges related to its Year 2000
remediation effort. The remediation costs include internal labor costs, as
well as fees and expenses paid to outside contractors specifically
associated with programming and purchased hardware and upgraded software.
The Company incurred approximately $13,000 in Year 2000 modification
expenses during the quarter ended December 31, 1999, and $4,000 during the
quarter ended March 31, 2000.
As of the date of this report, the Company has not experienced any material
Year 2000 related problems. Based on currently available information,
management does not believe that the Year 2000 matters discussed above will
have a material adverse impact on the Company's financial condition or
results of operations; however, because of the uncertainties in this area,
no assurances can be given in this regard.
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB") ordered the Company in 1988 and 1989 to investigate the
contamination on its property (relating to soil and groundwater
contamination). The Company engaged a consultant who performed tests and
reported to the then Chairman of the Company. The Company resisted further
work on its property until the property upgradient was tested in greater
detail since two "apparent source" lots had not been tested. On August 12,
1991, the RWQCB issued a "Cleanup and Abatement Order" directing the
Company to conduct further testing and cleanup the site. In October 1991,
the Company received from an environmental consulting firm an estimate of
$465,200 for investigation and cleanup costs. The Company believed that
this estimate was inconclusive and overstated the contamination levels. The
Company believes that subsequent investigations will support the Company's
conclusions about that estimate. The Company did not complete the testing
for the reasons listed above as well as "financial constraints". In June
1992 the RWQCB requested that the EPA evaluate the contamination and take
appropriate action. At the EPA's request, Ecology & Environment, Inc.
conducted an investigation of soil and groundwater on the Company's
property. Ecology & Environment Inc.'s Final Site Assessment Report, which
was submitted to the EPA in June 1994, did not rule out the possibility
that some of the contamination originated on-site, and resulted from either
past or current operations on the property. The Company may be liable for
all or part of the costs of remediating the contamination on its property.
The EPA has not taken any further action in this matter, but may do so in
the future.
The Company and nearby property owners, in consort with their comprehensive
general liability (CGL) carriers, have engaged a consultant to perform a
site investigation with respect to soil and shallow groundwater
contamination over the entire city block. The CGL carriers provided
$290,000 in funding which paid for the $220,000 study, $20,000 in legal
fees for project oversight, and a $50,000 balance in the operating fund.
Earlier the Company had accrued $87,500 as its proportionate share of the
earlier quote of $175,000. Since that time, the overall scope of the
project was increased to $205,000 plus $15,000 for waste water disposal,
bringing the total to the above listed $220,000. The $87,500 accrual was
not spent on this project (as the entire cost was borne by the CGL
carriers), but remains on the books as an accrual against the cost of
remediation of the same site that was included in the study.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination
on the properties leased by the tenants. The case name is DEL RAY
INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los Angeles County
Superior Court, Northwest District, commenced August 21, 1991. In this
action, the plaintiff alleges environmental contamination by defendants of
its property, and seeks a court order preventing further contamination and
monetary damages. The Company does not believe there is any basis for the
allegations and is vigorously defending the lawsuit.
10
<PAGE>
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 $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 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,
trichloroethene 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
11
<PAGE>
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,
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 has offered to settle the
Company's potential liability with respect to the Monterey Site for a cost
to the Company of $79,233. The Company accrued a $79,000 charge in the
third quarter of fiscal 1998 with respect to this possible liability. The
Company has elected to file for relief from these obligations under the
financial hardship option in the EPA's response form.
The Company was recently notified by the EPA that the Company may have
potential liability for waste material it disposed of at the Casmalia
Disposal Site ("Site") located on a 252-acre parcel in Santa Barbara
County, California. The Site was operational from 1973 to 1989 and over
10,000 separate parties disposed of waste there. The EPA stated that
federal, state and local governmental agencies along with the numerous
private entities that used the Site for waste disposal will be expected to
pay their share as part of this settlement. The U.S. EPA is also pursuing
the owner(s)/operator(s) of the Site to pay for Site remediation. The EPA
has a settlement offer to the Company with respect to the Site for a cost
of $373,950. The Company accrued a $374,000 charge in the first quarter of
fiscal 1999 with respect to this possible liability. The Company has
elected to file for relief from these obligations under the financial
hardships option in the EPA's response form.
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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations-Environmental Matters" is incorporated herein by
reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the registrant occurred on March 14, 2000.
At that meeting, the following directors were elected:
<TABLE>
<CAPTION>
VOTES
-----------------------------
Director FOR WITHHELD
--- --------
<S> <C> <C>
Dr. Henry L. Lee 3,446,054 115,917
Ronald G. Lee 3,444,052 117,919
William M. Caldwell IV 3,446,154 115,817
<CAPTION>
VOTES
---------------------------------------
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
The amendment to the Bylaws to
reduce the authorized number
of directors to not less than
three nor more than five 1,656,705 73,807 13,877 1,818,382
<CAPTION>
VOTES
---------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
The appointment of George Brenner, CPA
as independent auditor 3,522,684 29,630 9,657
</TABLE>
Item 6. The following exhibits are filed herewith:
10.1 - Promissory note evidencing advance made to the Registrant
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.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Acts of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEE PHARMACEUTICALS
-------------------
(Registrant)
Date: May 12, 2000 /s/ RONALD G. LEE
---------------------------------------
Ronald G. Lee
Chairman of the Board, President and
Chief Financial and Accounting Officer
14
<PAGE>
EXHIBIT 10.1
- ------------------------------------------------------------------------------
STRAIGHT NOTE
$300,000 South El Monte, California January 14, 2000
- -----------------
For value received, Lee Pharmaceuticals promises to pay Mark DiSalvo or
order, at South El Monte, California the sum of THREE HUNDRED THOUSAND DOLLARS,
with interest from January 18, 2000, on unpaid principal at the rate of twenty
(20) per cent per annum; principal is payable monthly, commencing on February
20, 2000, with monthly principal payments of $10,000. Interest shall be
calculated on the basis of the unpaid principal balance daily, based on a
365-day year, actual day month and payable monthly. Principal and interest shall
be payable in lawful money of the United States. If action were instituted on
this note, I promise to pay such sum as the Court may fix as attorney's fees.
This note is secured by the following trademark; Serutan.
1/15/2000 RONALD G. LEE
- -------------------- --------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
1/15/2000 MICHAEL L. AGRESTI
- -------------------- --------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
- ------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 1,231
<ALLOWANCES> (308)
<INVENTORY> 2,493
<CURRENT-ASSETS> 4,137
<PP&E> 5,449
<DEPRECIATION> (4,943)
<TOTAL-ASSETS> 8,095
<CURRENT-LIABILITIES> 6,938
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> 3,026
<TOTAL-LIABILITY-AND-EQUITY> 8,095
<SALES> 4,761
<TOTAL-REVENUES> 5,263
<CGS> 2,266
<TOTAL-COSTS> 4,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 439
<INCOME-PRETAX> 28
<INCOME-TAX> 0
<INCOME-CONTINUING> 28
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
