**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                           |                                                                                           |   |
| **For  the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                           |
| **OR**                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                                                                                                                                                          | **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**                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                |                                                                                                |  |  |  |

 

**LEEPHARMACEUTICALS**

(Exact name of small business issuer as specified inits charter)

 

| **California**                                                                      |   | **95  - 2680312**                     |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **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, 2003 there were outstanding 4,135,162shares of common stock of the registrant.

 

Transitional Small Business Disclosure Format (checkone):

Yes        o      No        ý

 

 

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**LEEPHARMACEUTICALS**

**BALANCESHEET**

**MARCH31, 2003**

**(Dollarsin thousands)**

**(Unaudited)**

 
| **ASSETS**                                                                              |   |    |      |      |       |
|-----------------------------------------------------------------------------------------|--------|---------|-----------|-----------|------------|
|                                                                                    |   |    |      |      |       |
| Cash                                                                                    |   |    |      | **$**     | **34**     | ** ** |
|                                                                                    |   |    |      |      |       |
| Accounts  and notes receivable (net of allowances: $188)                                |   |    |      | **1,002** | ** ** |
|                                                                                    |   |    |      |      |       |
| Inventories  (net of reserves: $325)                                                    |   |    |      |      |       |
| Raw  materials                                                                          |   | **$**   | **2,018** |      |       | ** ** |
| Work  in process                                                                        |   | **215** |      |      | ** ** |
| Finished  goods                                                                         |   | **421** |      |      | ** ** |
|                                                                                    |   |    |      |      |       |
| Total  inventories                                                                      |   |    |      | **2,654** | ** ** |
|                                                                                    |   |    |      |      |       |
| Other  current assets                                                                   |   |    |      | **724**   | ** ** |
|                                                                                    |   |    |      |      |       |
| Total  current assets                                                                   |   |    |      | **4,414** | ** ** |
|                                                                                    |   |    |      |      |       |
| Property,  plant and equipment (less accumulated depreciation and amortization: $5,397) |   |    |      | **649**   | ** ** |
|                                                                                    |   |    |      |      |       |
| Investment                                                                              |   |    |      | **601**   | ** ** |
|                                                                                    |   |    |      |      |       |
| Intangibles  and other assets (net of accumulated amortization: $906)                   |   |    |      | **2,237** | ** ** |
|                                                                                    |   |    |      |      |       |
| **TOTAL**                                                                               |   |    |      | **$**     | **7,901**  | ** ** |
|                                                                                         |        |         |           |           |            |  |  |

 

See Accompanying Selected Information to UnauditedCondensed Financial Statements.

 

2

----

 

**LEEPHARMACEUTICALS**

**BALANCESHEET**

**MARCH31, 2003**

**(Dollarsin thousands)**

**(Unaudited)**

 
| **LIABILITIES**                                                                                       |   |       |       |
|-------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                  |   |       |       |
| Bank  overdraft                                                                                       |   | **$**      | **92**     | ** ** |
| Notes  payable - bank                                                                                 |   | **994**    | ** ** |
| Current  portion - notes payable, other                                                               |   | **1,259**  | ** ** |
| Current  portion - note payable related party                                                         |   | **850**    | ** ** |
| Due  on investment acquisition                                                                        |   | **278**    | ** ** |
| Accounts  payable                                                                                     |   | **1,593**  | ** ** |
| Other  accrued liabilities                                                                            |   | **449**    | ** ** |
| Environmental  cleanup liability                                                                      |   | **366**    | ** ** |
| Due  to related parties                                                                               |   | **937**    | ** ** |
| Deferred  income                                                                                      |   | **151**    | ** ** |
|                                                                                                  |   |       |       |
| Total  current liabilities                                                                            |   | **6,969**  | ** ** |
|                                                                                                  |   |       |       |
| Long-term  notes payable - bank                                                                       |   | **202**    | ** ** |
| Long-term  notes payable to related parties                                                           |   | **1,774**  | ** ** |
| Long-term  notes payable, other                                                                       |   | **2,024**  | ** ** |
| Environmental  cleanup liability - Casmalia Site                                                      |   | **374**    | ** ** |
| Deferred  income                                                                                      |   | **100**    | ** ** |
|                                                                                                  |   |       |       |
| Total  long-term liabilities                                                                          |   | **4,474**  | ** ** |
|                                                                                                  |   |       |       |
| Total  liabilities                                                                                    |   | **11,443** | ** ** |
|                                                                                                  |   |       |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                    |   |       |       |
|                                                                                                  |   |       |       |
| **STOCKHOLDERS’  (DEFICIT)**                                                                     |   |       |       |
|                                                                                                  |   |       |       |
| Common  stock, $.10 par value; authorized, 7,500,00 shares; issued and outstanding,  4,135,162 shares |   | **413**    | ** ** |
|                                                                                                  |   |       |       |
| Additional  paid-in capital                                                                           |   | **4,222**  | ** ** |
|                                                                                                  |   |       |       |
| Accumulated  (deficit)                                                                                |   | **(8,177** | **)**      |
|                                                                                                  |   |       |       |
| Total  stockholders’ (deficit)                                                                   |   | **(3,542** | **)**      |
|                                                                                                  |   |       |       |
| **TOTAL**                                                                                             |   | **$**      | **7,901**  | ** ** |

 

 

See Accompanying Selected Information to UnauditedCondensed Financial Statements.

 

3

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**LEEPHARMACEUTICALS**

**STATEMENTSOF OPERATIONS**

**(Dollarsin thousands, except per share amounts)**

**(Unaudited)**

 
|                                        |   | **For the  Three Months  Ended March 31,** |       | **For the  Six Months  Ended March 31,** |   |
|---------------------------------------------|--------|--------------------------------------------|------------|------------------------------------------|--------|
|                                        |   | **2003**                                   |       | **2002**                                 |   | **2003** |   | **2002** |   |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Gross  revenues                             |   | **$**                                      | **2,825**  | ** **                               | $      | 2,746 |   | **$** | **5,516** | ** ** | $ | 5,180 |   |
| Less:    Sales  returns |   | **(269**                                   | **)**      | (265                                     | )      | **(549** | **)** | (446 | ) |
| Cash  discounts and others                  |   | **(37**                                    | **)**      | (20                                      | )      | **(63** | **)** | (41 | ) |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Net  revenues                               |   | **2,519**                                  | ** ** | 2,461                                    |   | **4,904** | ** ** | 4,693 |   |
| Costs  and expenses:                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Cost  of sales                              |   | **1,346**                                  | ** ** | 1,201                                    |   | **2,583** | ** ** | 2,363 |   |
| Selling  and advertising expense            |   | **746**                                    | ** ** | 792                                      |   | **1,467** | ** ** | 1,400 |   |
| General  and administrative expense         |   | **356**                                    | ** ** | 319                                      |   | **661** | ** ** | 615 |   |
| Interest  expense                           |   | **240**                                    | ** ** | 184                                      |   | **443** | ** ** | 366 |   |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Total  costs and expenses                   |   | **2,688**                                  | ** ** | 2,496                                    |   | **5,154** | ** ** | 4,744 |   |
| Loss  from operations                       |   | **(169**                                   | **)**      | (35                                      | )      | **(250** | **)** | (51 | ) |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Other  income                               |   | **99**                                     | ** ** | 27                                       |   | **196** | ** ** | 53 |   |
|                                        |   |                                       |       |                                     |   |   |   |   |   |
| Net  income (loss)                          |   | **$**                                      | **(70**    | **)**                                    | $      | (8 | ) | **$** | **(54** | **)** | $ | 2 |   |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Per  share:                                 |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
|                                        |   |                                       | ** ** |                                     |   |   | ** ** |   |   |
| Basic  and diluted income (loss) per share  |   | **$**                                      | **(.02**   | **)**                                    | $      | .00 |   | **$** | **(.01** | **)** | $ | .00 |   |

 

See AccompanyingSelected Information to Unaudited Condensed Financial Statements.

 

4

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**LEE PHARMACEUTICALS**

**STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
|                                                                                          |   | **For the  Six Months  Ended March 31,** |       |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                          |   | **2003**                                 |       | **2002** |   |
|                                                                                          |   |                                     |       |   |   |
| Cash  flows provided by (used in) operating activities:                                       |   |                                     | ** ** |   |   |
| Net  income (loss)                                                                            |   | **$**                                    | **(54**    | **)** | $ | 2 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                                     | ** ** |   |   |
| Depreciation                                                                                  |   | **75**                                   | ** ** | 89 |   |
| Amortization  of intangibles                                                                  |   | **99**                                   | ** ** | 213 |   |
| Other  (income)                                                                               |   | **(75**                                  | **)**      | (55 | ) |
|                                                                                          |   |                                     | ** ** |   |   |
| Change  in operating assets and liabilities:                                                  |   |                                     | ** ** |   |   |
| Decrease  (increase) in accounts receivable                                                   |   | **95**                                   | ** ** | (492 | ) |
| (Decrease)  in allowance for doubtful accounts and sales returns and allowances               |   | **(11**                                  | **)**      | (117 | ) |
| (Increase)  in inventories                                                                    |   | **(185**                                 | **)**      | (202 | ) |
| (Decrease)  in inventory reserve                                                              |   | **(51**                                  | **)**      | (74 | ) |
| (Increase)  decrease in deposits                                                              |   | **(32**                                  | **)**      | 61 |   |
| (Increase)  in other current assets                                                           |   | **(188**                                 | **)**      | (61 | ) |
| Increase  in accounts payable and accrued liabilities                                         |   | **368**                                  | ** ** | 152 |   |
| Increase  in due to related parties - accrued interest                                        |   | **35**                                   | ** ** | 24 |   |
| Net  cash provided by (used in) operating activities                                          |   | **76**                                   | ** ** | (460 | ) |
|                                                                                          |   |                                     | ** ** |   |   |
| Cash  flows from investing activities:                                                        |   |                                     | ** ** |   |   |
| Additions  to property, plant, and equipment                                                  |   | **(206**                                 | **)**      | (70 | ) |
| Proceeds  from sale of product brand                                                          |   | —                                   | ** ** | 265 |   |
| Acquisition  of product brand                                                                 |   | —                                   | ** ** | (225 | ) |
| Net  cash (used in) investing activities                                                      |   | **(206**                                 | **)**      | (30 | ) |
|                                                                                          |   |                                     | ** ** |   |   |
| Cash  flows from financing activities:                                                        |   |                                     | ** ** |   |   |
| Proceeds  from notes payable to related party                                                 |   | **25**                                   | ** ** | 50 |   |
| (Payments  on) notes payable to related party                                                 |   | **(80**                                  | **)**      | (81 | ) |
| (Payments  on) proceeds from notes payable - bank                                             |   | **(38**                                  | **)**      | 162 |   |
| Proceeds  from notes payable, other                                                           |   | **686**                                  | ** ** | 900 |   |
| (Payments  on) notes payable, other                                                           |   | **(474**                                 | **)**      | (540 | ) |
| Increase  in bank overdraft                                                                   |   | **19**                                   | ** ** | 5 |   |
| Net  cash (used in) provided by financing activities                                          |   | **(138**                                 | **)**      | 496 |   |
|                                                                                          |   |                                     | ** ** |   |   |
| Net  increase in cash                                                                         |   | **8**                                    | ** ** | 6 |   |
| Cash,  beginning of period                                                                    |   | **26**                                   | ** ** | 5 |   |
|                                                                                          |   |                                     | ** ** |   |   |
| Cash,  end of period                                                                          |   | **$**                                    | **34**     | ** ** | $ | 11 |   |
|                                                                                          |   |                                     | ** ** |   |   |
| **Supplemental  disclosures of cash flow information:**                                       |   |                                     | ** ** |   |   |
|                                                                                          |   |                                     | ** ** |   |   |
| Cash  paid during the period for:                                                             |   |                                     | ** ** |   |   |
| Interest                                                                                      |   | **$**                                    | **410**    | ** ** | $ | 326 |   |
| Taxes                                                                                         |   | **$**                                    | **1**      | ** ** | $ | 1 |   |
|                                                                                          |   |                                     | ** ** |   |   |
| **Acquisition  of investment:**                                                               |   |                                     | ** ** |   |   |
|                                                                                          |   |                                     | ** ** |   |   |
| Investment  acquired by debt                                                                  |   | **$**                                    | **601**    | ** ** | $ | — |   |

 

See AccompanyingSelected Information to Unaudited Condensed Financial Statements.

 

5

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SELECTED FINANCIALINFORMATION

Substantially AllDisclosures Required By Generally Accepted Accounting Principals Are NotIncluded

 

**Notes to Financial Information**

 

1.               Basis ofpresentation:

 

The condensed interimfinancial statements included herein have been prepared by Lee Pharmaceuticalswithout audit, pursuant to the rules and regulations of the Securities andExchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations, although theCompany believes that the disclosures are adequate to make the information presentednot misleading.

 

These statements reflectall adjustments, consisting of normal recurring adjustments which, in theopinion of management, are necessary for fair presentation of the informationcontained herein.  It is suggested thatthese condensed financial statements be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form10-KSB for the year ended September 30, 2002. The Company follows the same accounting policies in preparation ofinterim reports.

 

Results of operations forthe interim periods may not be indicative of annual results.

 

The Company is involvedin various matters involving environmental cleanup issues.  See “Item 2. Management’s Discussionand Analysis or Plan of Operations” and Note 12 of Notes to FinancialStatements included in the Company’s Form 10-KSB for the fiscal year endedSeptember 30, 2002.  The ultimateoutcome of these matters cannot presently be determined.  Environmental expenditures that relate to anexisting condition caused by past operations, and which do not contribute tocurrent or future revenue generation, are expensed.  The Company’s proportionate share of the liabilities are recordedwhen environmental remediation and/or cleanups are probable, and the costs canbe reasonably estimated.  As of March31, 2003, no settlements have been reached.

 

2.               Continuedexistence:

 

The financial statementshave been prepared assuming that the Company will continue as a goingconcern.  The Company has an accumulateddeficit of $8,177,000.  The Company’srecurring losses from operations and inability to generate sufficient cash flowfrom normal operations to meet its obligations as they come due raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The Company’s ability tocontinue in existence is dependent upon future developments, includingretaining current financing and achieving a level of profitable operationssufficient to enable it to meet its obligations as they become due.  Management’s plans in regard to thesematters are to increase profitability by increasing sales, control expenses andseek additional financing from outside lenders.  The financial statements do not include any adjustments toreflect the possible future effects of the recoverability and classification ofassets or the amounts and classification of liabilities that may result fromthe possible inability of the Company to continue as a going concern.

 

3.               Use of estimates:

 

The preparation offinancial statements in conformity with generally accepted accountingprincipals requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ  from those estimates.

 

4.               Reclassification:

 

Certain reclassificationshave been made to the prior year financial statements to be consistent with the2003 presentation.

 

6

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5.               Impairment ofintangible assets:

 

At March 31, 2003, theCompany had $5.1 million of product line and certain identifiableintangibles.  In assessing the recoverabilityof these intangibles, the Company must make assumptions regarding estimatedfuture cash flows and other factors to determine the fair value of therespective assets.  If the estimates ortheir related assumptions change in the future, the Company may be required torecord impairment charges for these assets not previously recorded.  In connection with the adoption of SFAS 142issued in July 2001, the Company performed an impairment assessment for sixmonths ended March 31, 2003, and deemed that no impairment charge is necessary.

 

6.               Earnings per share:

 

The Company has a simplecapital structure, and there were no changes under the SFAS 128 methodology tothe previously reported earnings (loss) per share amounts for any of the fiscalyears.  Basic earnings per share underSFAS 128 were computed using the weighted average number of shares outstandingof 4,135,162 for the three and six months ended March 31, 2003 and 5,265,162for the three and six months ended March 31 2002.  Differences in the weighted average number of shares outstandingfor purposes of computing diluted earnings per share were due to the inclusionof the dilutive effect of stock options previously granted.  These differences in the weighted averagenumber of shares outstanding for the calculation of basic and diluted earningsper share resulted in no differences in the earnings per share.

 

7.               Acquisition:

 

In December 2002, theCompany signed an agreement with The Monticello Companies, Inc. relating to theacquisition of a product line in conjunction with a large pharmaceuticalcompany.  The original agreement calledfor Lee Pharmaceuticals to have a 40% ownership interest in the product lineand to receive 40% of the net product profits as a monthly royalty.  This investment was recorded on the booksfor $800,800.  The Company paid $430,000and recorded a current liability of $370,800. As part of the agreement, after June 30, 2003, the Company will takeover the sales, marketing, warehousing, shipping, invoicing and collection ofthe brand for a 7% fee.  This agreementwas revised in February 2003, so that Lee Pharmaceuticals’ ownership interestand monthly royalty were reduced to 30%. The Monticello Companies, Inc. repaid $107,500 of the original amountpaid by the Company, and the Company has reduced the current liability ‘Due on Investment Acquisition’ to $278,100.  The Company reduced the original investmenton the balance sheet to $600,600.

 

8.               Other income:

 

For the six months endedMarch 31, 2003, the Company realized gains of approximately $22,000 related tothe sale of the Astring-o-Sol® product line and approximately $52,000 related to thesale of the Klutch®product line.  The realized gainspertain to the recognition of the earned portion of the deferred income of theconsulting agreements arising from the sale of the Astring-o-Sol® and Klutch® brands.  These amounts are included in other incomeon the statements of operations.  Alsoincluded in other income is $15,000 in property tax refunds paid in prior yearsand approximately $105,000, which is the Company’s portion of the net profitsfrom their new investment with The Monticello Companies, Inc.

 

7

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9.               Subsequent events:

 

Subsequent to March 31,2003, Lee Pharmaceuticals agreed orally, with The Monticello Companies, Inc.,to sell back their remaining30% interest in theproduct brand acquisition.  Inconjunction with this, Lee Pharmaceuticals’ monthly royalties will be reducedaccordingly.  The Company received$107,500, plus a portion of their royalties, in April 2003.  The remaining balance of the cash paid of$215,000 will be repaid prior to July 31, 2003.  At that time, Lee Pharmaceuticals will no longer have aninvestment interest or royalty interest in the product brand.  At March 31, 2003, the amounts recorded bythe Company as an investment of $600,600 and a related liability of $278,100,result in a net of $322,500, which is the amount to be repaid to them from TheMonticello Companies, Inc. subsequent to the balance sheet date.

 

8

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**Item 2.****           Management’sDiscussion and Analysis or Plan of Operations.**

 

**Material Changes in Results ofOperations**

**Three Months Ended March 31, 2003,and March 31, 2002**

 

Gross revenues for thethree months ended March 31, 2003, were $2,825,000, an increase ofapproximately $79,000, or 3%, from the comparable three months ended March 31,2002.  The Company reported increasedvolume in newly acquired product brands ($370,000) plus the added sales from theprivate label ($229,000) segment.  Inaddition, the Company reported volume increases from several over-the-counter(OTC) products.  The increase in grossrevenues was partially offset by lower sales volume of existing brands such asLee®Lip-Ex® ($235,000),depilatories, as well as other OTC brands and prescription drug products($288,000).

 

Net revenues increasedapproximately $58,000, or 2%, for the three months ended March 31, 2003, ascompared to the three months ended March 31, 2002.  The change in net revenues was due to the sales volumeexplanations discussed above.  TheCompany’s sales returns showed a nominal increase of approximately $4,000, or2%, when comparing the three months ended March 31, 2003 and 2002.  The amount of sales returns related to priorproduct recalls has diminished.

 

Cost of sales as apercentage of gross revenues was 48% for the three months ended March 31, 2003,compared to 44% for the three months ended March 31, 2002.  The increased cost of sales percentage wasdue to the continued change in the product mix and lower priced commodity-typegoods with an accompanying higher cost of goods attached to them, therebygenerating lower gross margins on sales of these related products.  In addition, the Company incurred additionalbuilding rental expense ($17,300) since the facility was previously subleasedon a month-to-month basis, and now the Company needs the facility formanufacturing.  The Company alsoincurred additional manufacturing overhead expenses due to the expanded analyticaltesting requirements of the various production batches of the Company products($44,800) along with increased labor costs, the result of additional manpowerin the Quality Control Department ($17,000).

 

Selling and advertisingexpenses decreased $46,000, or 6%, when comparing the three months ended March31, 2003 with the three months ended March 31, 2002.  The decrease in expenses was due to the following factors: (1) areduction in amortization expense ($57,000), the result of the Financial AccountingStandards Board issuance of Statement of Financial Accounting Standards No. 142(FAS-142), Goodwill and Other Intangible Assets.  In connection with the adoption of this standard, the Company’sunamortized goodwill balance (product line) will no longer be amortized overits estimated useful life.  Also, theCompany experienced (2) lower sales force commissions/bonuses along with salaryand related fringe benefits resulting from the resignation of a sales personwho was not replaced ($27,800), and (3) lower commissions ($10,000), the resultof increased sales into open territories. The above decreases were partially offset by (1) added royalty expensefrom new acquisitions ($61,000), and (2) higher insurance expense due toincreased premiums for product liability coverage ($12,000).

 

General andadministrative expenses increased $37,000, or 12%, when comparing the threemonths ended March 31, 2003, with the three months ended March 31, 2002.  This increase was principally due to higherMIS (Management Information Systems) expenses for consulting services($36,000), and higher legal fees ($39,000). These expenses were partially offset by (1) lower salary and relatedfringe benefits due to the termination of an employee ($11,000), (2) reducedprinting materials and supplies expense ($15,000), and (3) lower buildingrental expense because the facility is currently occupied by the productiondepartment ($10,000).

 

Interest expenseincreased $56,000, or 30%, when comparing the three months ended March 31, 2003,with the three months ended March 31, 2002. The increase was due to higher overall borrowings (principal) by theCompany.  The above was somewhat offsetby a lower average prime interest rate (4.25% vs. 4.75%) in reference tocertain loans which are tied to prime.

 

The Company realizedother income of approximately $99,000 for the three months ended March 31,2003, as compared to $27,000 for the comparable three months ended March 31,2002. The income pertains to realized gains related to the sale of theAstring-o-Sol® product line ($11,000) and approximately $26,000 related to thesale of the Klutch® product line. The realized gains pertain to the recognitionof the earned portion of the deferred income of the consulting agreementsarising from the sale of the Astring-o-Sol® and Klutch® brands. Also includedin other income is approximately $60,000 which is the Company's portion of thenet profits from their new investment with The Monticello Companies, Inc. Forthe three months ended March 31, 2002, the Company realized other income($27,000) related to the sale of the Klutch® product line.

 

9

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**Material Changes in Results ofOperations**

**Six Months Ended March 31, 2003, andMarch 31, 2002**

 

Gross revenues for thesix months ended March 31, 2003, were $5,516,000, an increase of approximately$336,000, or 6%, from the comparable six months ended March 31, 2002.  The increased sales volume was due to newlyacquired product brands ($643,000) plus the added sales from the private label($431,000) segment.  In addition, theCompany reported volume increases from several OTC products.  The above increased gross revenues weresomewhat offset by lower sales volume of existing brands, namely Lee® Lip-Ex® ($291,000), depilatories, aswell as other OTC brands and prescription drug products ($383,000).

 

Net revenues increasedapproximately $211,000, or 4%, for the six months ended March 31, 2003, ascompared to the six months ended March 31, 2002.  The change in net revenues was due to the sales volumeexplanations discussed above.  TheCompany’s sales returns increased $103,000, or 23%, when comparing the sixmonths ended March 31, 2003 and 2002. The higher amount of sales returns is related to prior product recalls.

 

Cost of sales as apercentage of gross revenues was 47% for the six months ended March 31, 2003,compared to 46% for the six months ended March 31, 2002.  This slight increase in the cost of salespercentage was due to the continued change in the product mix along with lowerpriced commodity-type goods with an accompanying higher cost of goods attachedto them, thereby generating lower gross margins on sales of these relatedproducts.  The Company also incurredincreased manufacturing overhead expenses due to the expanded analyticaltesting requirements of the various production batches of the Company products($64,000), and increased labor costs as a result of additional manpower in theQuality Control Department ($21,000). Furthermore, the Company incurred additional building rental expense($38,400) since the building, previously subleased on a month-to-month basis,is now needed by the Company for manufacturing.

 

Selling and advertisingexpenses increased $67,000, or 5%, when comparing the six months ended March31, 2003 with the six months ended March 31, 2002.  The increase in expenses was due to the following factors: (1)added royalty expense from new acquisitions ($126,000), (2) higher insuranceexpense because of increased premiums for product liability coverage ($28,000),and (3) added cooperative advertising ($57,000).  The above increases were somewhat offset by a reduction inamortization expense ($114,000), the result of the Financial AccountingStandards Board issuance of Statement of Financial Accounting Standards No. 142(FAS-142), Goodwill and Other Intangible Assets.  In connection with the adoption of this standard, the Company’sunamortized goodwill balance (product line) will no longer be amortized overits estimated useful life.  In addition,the Company experienced lower sales force commissions/bonuses along with salaryand related fringe benefits resulting from the resignation of a sales personwho was not replaced ($31,000).

 

General andadministrative expenses increased $46,000, or 7%, when comparing the six monthsended March 31, 2003, with the six months ended March 31, 2002.  The increase was principally due to higherMIS expenses for consulting services ($56,000), and higher legal fees ($39,000).  These expenses were principally offset by(1) lower salary and related fringe benefits, the result of an employeetermination ($14,000), (2) reduced printing materials and supplies expense($17,000), and (3) lower building rental expense because the facility iscurrently occupied by manufacturing ($14,000).

 

Interest expenseincreased $77,000, or 21%, when comparing the six months ended March 31, 2003,with the six months ended March 31, 2002. This was due to increased borrowings at a rate higher than the primerate, but was somewhat offset by a lower average prime interest rate (4.25% vs.4.95%) in reference to certain loans which are tied to prime.

 

For the six months endedMarch 31, 2003, the Company realized other income in the amount of $196,000 ascompared to $53,000 for the six months ended March 31, 2002. This increase wasdue to the same explanations discussed earlier namely; gains related to thesale of the Astring-o-Sol® & Klutch® product lines ($75,000) and theCompany's portion of the net profits from their new investment with the MonticelloCompanies, Inc. ($105,000).

 

**Liquidity and Capital Resources**

 

At March 31, 2003,working capital was a negative $2,555,000 compared with a negative $1,883,000as of September 30, 2002.  The ratio ofcurrent assets to current liabilities was .6 to 1 at March 31, 2003, and .7 to1 at September 30, 2002.  The increasein the Company’s negative working capital was primarily due to a decrease inaccounts receivable and an increase in payables and acquisition investmentdebt.

 

10

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The Company has anaccumulated deficit of $8,177,000. Although the Company experienced nominal net income in fiscal years 2000and 2001, and the three months ended December 31, 2002, past recurring lossesand inability to generate sufficient cash flow from normal operations to meetits obligations as they become due, raises substantial doubt about theCompany’s ability to continue as a going concern.  The Company’s ability to continue in existence is dependent uponfuture developments, including retaining current financing and achieving alevel of profitable operations sufficient to enable it to meet its obligationsas they become due.

 

**Environmental Matters**

 

The Company owns amanufacturing facility located in South El Monte, California.  The California Regional Water QualityControl Board (The “RWQCB”) ordered the Company in 1988 and 1989 to investigatethe contamination on its property (relating to soil and groundwatercontamination).  The Company engaged aconsultant who performed tests and reported to the then Chairman of theCompany.  The Company resisted furtherwork on its property until the property upgradient was tested in greater detailsince two “apparent source” lots had not been tested.  On August 12, 1991, the RWQCB issued a “Cleanup and AbatementOrder” directing the Company to conduct further testing and cleanup thesite.  In October 1991, the Companyreceived from an environmental consulting firm an estimate of $465,200 for investigationand cleanup costs.  The Company believedthat this estimate was  inconclusive andoverstated the contamination levels. The Company believes that subsequent investigations will support theCompany’s conclusions  about thatestimate.  The Company did not completethe testing for the reasons listed above as well as “financialconstraints”.  In June 1992, the RWQCBrequested that the EPA evaluate the contamination and take appropriateaction.  At the EPA’s request, Ecology& Environment, Inc. conducted an investigation of soil and groundwater onthe Company’s property.  Ecology &Environment Inc.’s Final Site Assessment Report, which was submitted to the EPAin June 1994, did not rule out the possibility that some of the contaminationoriginated on-site, and resulted from either past or current operations on theproperty.

 

On April 24, 2002, theRWQCB notified the Company that the detection of emergent chemicals ingroundwater, above State and Federal maximum containment levels or actionlevels, has caused the RWQCB and the EPA to reassess the threat posed togroundwater resources used for domestic supply.  The RWQCB directed the Company to test for the presence ofemergent chemicals in its groundwater monitoring wells.  The groundwater monitoring analyticalresults were due by July 15, 2002.  OnMay 24, 2002, the Company informed RWQCB that it could not comply with therequirement to conduct groundwater sampling due to ongoing financialdifficulties.

 

On July 8, 2002, theRWQCB sent a “Second Notice of Violation” to the Company directing the Companyto comply with the requirement to prepare a groundwater remedial action plan(RAP).  The Company previously notifiedthe RWQCB that it could not comply with the requirement to submit a RAP becauseof ongoing financial difficulties.  TheRWQCB requested that the Company submit certain financial information by July29, 2002 to “substantiate any alleged financial losses and determine whetherany suspension of implementing the...(Cleanup and Abatement Order) iswarranted.”  The Company has received anextension to submit the required financial information to August 19, 2002.  The Company submitted the requestedfinancial information on August 16, 2002. As of the date of the financial statements, no response has beenreceived regarding the Company’s request for relief due to financialhardship.  However, in April 2003, theCompany received a letter from the RWQCB directing the Company to conduct therequired testing and submit the technical report immediately.  The letter noted that failure to submit thereport may result in administrative civil penalties not to exceed $1,000 perday since July 15, 2002, the date the report was originally due.  The Company also may be liable for all orpart of the costs of remediating the contamination on its property and could besubject to enforcement action by the RWQCB, including injunctive remedies.  As of the date of the financial statements,the Company’s share of the costs have not been determined.

 

The Company and nearbyproperty owners, in consort with their comprehensive general liability (CGL)carriers, engaged a consultant to perform a site investigation with respect tosoil and shallow groundwater contamination over the entire city block.  The CGL carriers provided $290,000 infunding which paid for the $220,000 study, $20,000 in legal fees for projectoversight, and a $50,000 balance

 

11

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in the operatingfund.  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 theproject 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 entirecost was borne by the CGL carriers), but remains on the books as an accrualagainst the cost of remediation of the same site that was included in thestudy.

 

The tenants of nearbyproperties upgradient have sued the Company alleging that hazardous materialsfrom the Company’s property caused contamination on the properties leased bythe tenants.  The case name is DelRay Industrial Enterprises, Inc. v. Robert Malone, et al., LosAngeles County Superior Court, Northwest District, commenced August 21,1991.  In this action, the plaintiffalleges environmental contamination by defendants of its property, and seeks acourt order preventing further contamination and monetary damages.  The Company does not believe there is anybasis for the allegations and is vigorously defending the lawsuit.

 

The Company’s South ElMonte manufacturing facility is also located over a large area of possiblycontaminated regional groundwater which is part of the San Gabriel ValleySuperfund Site.  The Company has beennotified that it is a potentially responsible party  (“PRP”)  for thecontamination.   In 1995, the Companywas informed that the EPA estimated the cleanup costs for the South El Monte’sportion of the San Gabriel Valley Superfund Site to be $30 million.  The Company’s potential share of such amounthas not been determined.  Superfund PRPsare jointly and severally liable for superfund site costs, and are responsiblefor negotiating among themselves the allocation of the costs based on, amongother things, the outcome of environmental investigation.

 

In August 1995, theCompany was informed that the EPA entered into an Administrative Order ofConsent with Cardinal Industrial Finishes (“Cardinal”) for a PRP lead remedialinvestigation and feasibility study (the “Study”) which, the EPA states, willboth characterize the extent of groundwater contamination in South El Monte andanalyze alternatives to control the spread of contamination.  The Company and others entered into theSouth El Monte Operable Unit Site Participation Agreement with Cardinal pursuantto which, among other things, Cardinal contracted with an environmental firm toconduct the Study.  The Study has beencompleted.  The Company’s share of thecost of the Study was $15,000 and was accrued for in the financial statementsas of September 30, 1995.  The South ElMonte Operable Unit (SEMOU) participants developed four remedialalternatives.  The capital cost of thefour alternatives range from $0 (no action) up to $3.49 million.  The estimated annual operating cost for thefour alternatives range from $0 (no action) to $770,300.  Over a 30-year period, the total cost of thefour alternatives range from $0 (no action) up to $13.05 million.  The EPA prefers an alternative whichestimates 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 $9.09million.  The selection of the actualalternative implemented is subject to public comment.  At the present time, the Company does not know what its share ofthe cost may be, if any.  Therefore, noadditional accrual has been recognized as a liability on the Company’sbooks.  The Company requested that theEPA conduct an “ability-to-pay evaluation” to determine whether the Company isentitled to an early settlement of this matter based upon a limited ability topay costs associated with site investigation and remediation.  In August 2000, the EPA informed the Companythat it does not qualify for an early settlement at this time.

 

The EPA has informed theCompany that it has learned that the intermediate zone groundwatercontamination in the western portion of the SEMOU has migrated further west andhas now impacted the City of Monterey Park and Southern California WaterCompany production wells.  The EPAstated that the City of Monterey Park Water Department, San Gabriel ValleyWater Company and Southern California Water Company are planning to buildtreatment facilities for their wells. The EPA stated that these three water purveyors contacted some of theSEMOU PRPs, other than the Company, to seek funding to develop groundwatertreatment facilities for the contaminated wells.  A group of these PRPs calling themselves the “South El MonteCooperative Group” has been formed and purportedly has reached a generalagreement with the water purveyors to fund the development of treatmentfacilities and use the water purveyors’ wells in an attempt to contain thegroundwater contamination to meet EPA’s goals. At this time, the EPA has not reviewed or approved any specific plan toaddress contamination at the purveyor wells, nor has the EPA compromised itsright to recover response costs from any person who is legally responsible forcontamination within the SEMOU.  As ofthe date of this report, the Company has not been contacted by the South ElMonte Cooperative Group in respect to its participation in any proposed cleanupactivity.  As a result, the Company isnot able to determine what contribution, if any, it may be assessed inconnection with this cleanup activity.

 

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By letter dated November13, 2000, the Company was notified that the City of Monterey Park, San GabrielValley Water Company and Southern California Water Company intend to bring suitunder the Safe Drinking Water and Toxic Enforcement Act of 1986 alleging thatthe Company has knowingly released volatile organic compounds in the soil andshallow groundwater beneath the Company’s property between at least on orbefore November 8, 1996 and the present and has failed to promptly clean up allof the contamination.  As of the date ofthis report, the Company has not been served with this lawsuit.

 

The City of South ElMonte, the city in which the Company has its manufacturing facility, is locatedin the San Gabriel Valley.  The SanGabriel Valley has been declared a Superfund site.  The 1995 Water Quality Control Plan issued by the CaliforniaRegional Water Quality Control Board states that the primary groundwater basinpollutants in the San Gabriel Valley are volatile organic compounds fromindustry, nitrates from subsurface sewage disposal  and past agricultural activities.  In addition, the Plan noted that hundreds of underground storagetanks leaking gasoline and other toxic chemicals have existed in the SanGabriel Valley.  The CaliforniaDepartment of Toxic Substance Control has declared large areas of the SanGabriel Valley to be environmentally hazardous and subject to cleanup work.

 

The Company believes theCity of South El Monte does not appear to be located over any of the majorplumes.  However, the EPA has announcedit is studying the possibility that, although the vadose soil and groundwater,while presenting cleanup problems, there may be a contamination by DNAPs (densenon-aqueous phase liquids), i.e., “sinkers”, usually chlorinated organiccleaning solvents.  The EPA has proposedto drill six “deep wells” throughout the City of South El Monte at an estimatedcost of $1,400,000.  The EPA isconferring with SEMPOA (South El Monte Property Owners Association) as to costsharing on this project.  SEMPOA hasobtained much lower preliminary cost estimates.  The outcome cost and exact scope of this are unclear at thistime.

 

The Company and otherproperty owners engaged Geomatrix Consultants, Inc., to do a survey of vadosesoil and shallow groundwater in the “hot spots” detected in the previousstudies.  Geomatrix issued a reportdated December 1, 1997 (the “Report”), on the impact of volatile organiccompounds on the soil and groundwater at the Lidcombe and Santa Anita Avenuesite located in South El Monte, California (which includes the Company’sfacilities).  The Report indicatedgenerally low concentrations of tetrachloroethene, trichloaethene andtrichloroethane in the groundwater of the upgradient neighbor.  The Report was submitted to the RWQCB forits comments and response.  A meetingwith the parties and RWQCB was held on February 10, 1998.  The RWQCB had advised companies that vadose soilcontamination is minimal and requires no further action.  However, there is an area of shallowgroundwater which has a higher than desired level of chlorinated solvents, andthe RWQCB requested a proposed work plan be submitted by Geomatrix.  Geomatrix has submitted a “FocusedFeasibility Study” which concludes that there are five possible methods forcleanup.  The most expensive are for apump and sewer remediation which would cost between $1,406,000 and$1,687,000.  The Company is activelyexploring the less expensive alternative remediation methods, of which the twoproposed alternatives range in cost between $985,000 and $1,284,000.  Since there are four economic entitiesinvolved, the Company’s best estimate at this time, in their judgment, would bethat their forecasted share would be $287,000 less the liability already recognizedon the books of $165,000 thereby requiring an additional $122,000liability.  Accordingly, the Companyrecorded 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 followingparagraph.  The $79,000 accrual, in thethird quarter of fiscal 1998, related to the Monterey Site is not included inthe $287,000 figure above.  In April2000, the Company received a Notice of Violation from the RWQCB.  The Notice of Violation states that theCompany and other property owners were required to submit a groundwaterremedial action plan by November 1, 1999, and that the RWQCB has been advisedthat the Company and the other property owners were unable to submit therequired remedial action plan because the Company and the other property ownerscould not agree on the allocation of financial responsibility to prepare theaction plan.  The RWQCB stated that itwill no longer encourage the cooperative approach among the Company and theother property owners in completing the cleanup requirements and will pursueappropriate measures, including when necessary, enforcement actions.  The RWQCB states that it may impose civilliability penalties of up to $1,000 per day from November 1, 1999 for failureto file the action plan.  In light ofthese events, no assurances can be given that the cleanup costs and possiblepenalties 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 offiscal 1998).

 

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In July 2000, theproperty 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 FeasibilityStudy to the RWQCB for their review and approval of the selected remedialaction method for the site.  Afterreceiving RWQCB approval, LSAAW obtained three cost proposals to implement theRWQCB approved pump and treat remedial method. According to these cost proposals, the lowest estimated costs for anassumed five (5) years of pump and treat remediation is $600,000.  This cost is lower than the previous costproposed work plan, discussed above, from Geomatrix Consultants, Inc.  The capital costs including contingenciesare approximately $300,000.

 

The LSAAW is hopeful theWater Quality Authority (WQA) is willing and able to reauthorize its grant forone-half (1/2) of the capital costs of its remediation system construction notto exceed $150,000.  It is estimated atthis time that the reserves for the Company’s share of this cost proposal areadequate since its prior accrual was based on the higher cost estimate fromGeomatrix.

 

Without any priorcorrespondence or inkling of the Company’s potential liability, the EPAinformed the Company that the Company may have potential liability for theongoing remediation of Operating Industries, Inc. (as they have gone out ofbusiness) Landfill Superfund Site in Monterey Park, California (the “MontereySite”).  The Monterey Site is a 190 acrelandfill that operated from 1948 to 1984, in which the Company disposed of nontoxic pH balanced waste water on six occasions between 1974 and 1978.  Over 4,000 companies have been identified ashaving contributed waste to the Monterey Site. The EPA has offered to settle the Company’s potential liability withrespect to the Monterey Site for a cost to the Company of $79,233.  The Company accrued a $79,000 charge in thethird quarter of fiscal 1998 with respect to this possible liability.  The Company has elected to file for relieffrom these obligations under the financial hardship option in the EPA’s responseform.  On June 30, 2000, the EPA informedthe Company that the EPA believed the Company is able to pay the fullsettlement cost, but offered to reduce the amount of the settlement to $75,271.

 

The Company was notifiedby the EPA that the Company may have potential liability for waste material itdisposed of at the Casmalia Disposal Site (“Site”) located on a 252 acre parcelin Santa Barbara County, California. The Site was operational from 1973 to 1989, and over 10,000 separateparties disposed of waste there.  TheEPA stated that federal, state and local governmental agencies along with thenumerous private entities that used the Site for waste disposal will beexpected 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 Sitefor a cost of $373,950.  The Companyaccrued a $374,000 charge in the first quarter of fiscal 1999 with respect tothis possible liability.  The Companyhas elected to file for relief from these obligations under the financialhardships option in the EPA’s response form. The Company, the EPA and certain PRPs have entered into an agreementtolling the applicable statutes of limitation. The Company has been notified by the EPA that their request for awaiver, due to financial hardship, was “partially granted.”  Improvements in the bidding process haslowered 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 theirfindings on the application for waiver due to financial hardship.  The Company is considering the EPA’srequest.

 

The total amount ofenvironmental investigation and cleanup costs that the Company may incur withrespect to the foregoing is not known at this time.  However, based upon information available to the Company at thistime, the Company has expensed since 1988 a total of $860,000, of which $89,000were legal fees, exclusive of legal fees expended in connection with the SECenvironmental investigation.  The actualcosts could differ materially from the amounts expensed for environmentalinvestigation and cleanup costs to date.

 

As of March 31, 2003, nosettlements have been reached.  Thetotal amount expensed in prior years relating to this environmental issue is$860,000.  As of March 31, 2003, noadditional amounts have been expensed or accrued.  The Company has an accrued liability on the books at March 31,2003 of $740,000 for the environmental cleanup.

 

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**Item 3.****                                   Controlsand Procedures**

 

In the ninety dayperiod before the filing of the report, the chief executive officer and chieffinancial officer of the Company (the “certifying officer”) evaluated the effectivenessof the Company’s disclosure controls and procedures.  These disclosure controls and procedures are designed to ensurethat the information required to be disclosed by the Company in its periodicreports filed with the Securities and Exchange Commission (the “Commission”) isrecorded, processed, summarized and reported, within the time periods specifiedby the Commission’s rules and forms, and that the information is communicatedto the certifying officer on a timely basis.

 

The certifyingofficer concluded, based on his evaluation, that the Company’s disclosurecontrols and procedures are effective for the Company.

 

No significantchanges in the Company’s internal controls or in other factors were detectedthat could significantly affect the Company’s internal controls subsequent tothe date when the internal controls were evaluated.

 

** **

**PART II - OtherInformation**

 

**Item 1.            Legal Proceedings**

 

The informationset forth under Part I, Item 2, “Management’s Discussion and Analysis or Planof Operations - Environmental Matters” is incorporated herein byreference.  See also “LegalProceedings” in the Company’s Form 10-KSB for the fiscal year ended September30, 2002.

 

**Item 4.            Submission of Matters to a Vote of Security Holders**

 

The Annual Meetingof Stockholders of the registrant occurred on March 11, 2003.  At that meeting, the following directorswere elected:
|                    |   | **VOTES** |   |
|-------------------------|--------|-----------|--------|
| **Director**            |   | **FOR**   |   | **WITHHELD** |   |
|                    |   |      |   |   |   |
| Dr.  Henry L. Lee       |   | 3,483,730 |   | 109,387 |   |
| Ronald  G. Lee          |   | 3,483,730 |   | 109,387 |   |
| William  M. Caldwell IV |   | 3,483,230 |   | 109,887 |   |

 
|                                                                                             |   | **VOTES** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------|--------|
|                                                                                             |   | **FOR**   |   | **AGAINST** |   | **ABSTAIN** |   |
| The  appointment of Caldwell, Becker, Dervin, Petrick & Co., L.L.P. as  independent auditors |   | 3,501,147 |   | 45,400 |   | 46,570 |   |

** **

**Item 6.            Exhibits and Reports on Form 8-K:**

 

The followingexhibits are filed herewith:

 
| 10.1   | -      | Promissory note evidencing advance made to the Registrant                                                                                             |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                  |   |
| 10.2   | -      | Modification of secured  promissory note dated February 4, 2003, regarding inventory,between Lee  Pharmaceuticals and Preferred Business Credit, Inc. |   |
|   |   |                                                                                                                                                  |   |
| 10.3   | -      | Secured promissory note  dated November 14, 2002, regarding equipment, between Lee Pharmaceuticals and  Preferred Business Credit, Inc.               |   |
|   |   |                                                                                                                                                  |   |
| 10.4   | -      | Secured promissory note  dated February 4, 2003, regarding equipment, between Lee Pharmaceuticals and  Preferred Business Credit, Inc.                |   |

 

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The following exhibitshave 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) |   |

 

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(1)            Filed as an Exhibit of the samenumber with the Company’s Form S-1 Registration Statement filed with the Securitiesand Exchange Commission on February 5, 1973, (Registrant No. 2-47005), andincorporated herein by reference.

 

(2)            Filed as Exhibits 3.4 and 3.5 withthe Company’s Form 10-K Annual Report for the fiscal year ended September 30,1978, filed with the Securities and Exchange Commission and incorporated hereinby reference.

 

(3)            Filed as an Exhibit of the samenumber with the Company’s Form 10-K Annual Report for the fiscal year endedSeptember 30, 1979, filed with the Securities and Exchange Commission andincorporated herein by reference.

 

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SIGNATURES

 

In accordance withthe requirements of the Securities Exchange Acts of 1934, the registrant hascaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |         |   |   |   |                                    | LEE  PHARMACEUTICALS |   |
|--------|--------------|--------|--------|--------|-----------------------------------------|----------------------|--------|
|   |         |   |   |   | (Registrant)                            |
|   |         |   |   |   |                                    |
| Date:  | MAY 13, 2003 |   |   |   |                                    | RONALD G. LEE        |
|   |         |   |   |   | Ronald G. Lee                           |                 |
|   |         |   |   |   | Chairman of the Board,  President and   |
|   |         |   |   |   | Chief Financial and  Accounting Officer |
|        |              |        |        |        |                                         |                      |        |  |  |  |  |  |  |

 

**CERTIFICATIONS***

 

I,Ronald G. Lee, certify that:

 

1.I have reviewed this quarterly report on Form 10-QSB of Lee Pharmaceuticals;

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| Date:  | MAY  13, 2003 |   | RONALD  G. LEE                                                  |
|--------|---------------|--------|-----------------------------------------------------------------|
|   |          |   | Ronald G. Lee                                                   |
|   |          |   | President (Chief Executive Officer and Chief Financial Officer) |

 

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* Provide a separate certification for each principal executive officerand principal financial officer of the registrant.  See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above.

 

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**WRITTEN STATEMENT**

**PURSUANT TO**

**18 U.S.C. SECTION 1350**

 

The undersigned, RONALD G. LEE, the Chief ExecutiveOfficer/Chief Financial Officer, of LEE PHARMACEUTICALS (the “Company”),pursuant to 18 U.S.C. Section 1350, hereby certifies that:

 

(i)  the FORM 10-QSB of the Company for thequarter ended March 31, 2003 (the “Report”) fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and

 

(ii)  the information contained in the Reportfairly presents, in all material respects, the financial condition and resultsof operations of the Company.

 

 
| Dated: | MAY 13, 2003 |   |          |
|--------|--------------|--------|---------------|
|   |         |   |          |
|   |         |   |          |
|   |         |   | RONALD G. LEE |
|   |         |   | Ronald G. Lee |

 

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