<PAGE>
1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
COMMISSION FILE NUMBER 1-7335
LEE PHARMACEUTICALS
----------------------------------------------
(Name of small business issuer in its charter)
CALIFORNIA 95-2680312
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 SANTA ANITA AVENUE, SOUTH EL MONTE, CALIFORNIA 91733
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
ISSUER'S TELEPHONE NUMBER: (818) 442-3141
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- -----------------------------
Common stock, par value $.10 American Stock Exchange, Inc.
per share
SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $10,053,000 Gross
As of the close of business on November 30, 1995, the aggregate market value
of Lee Pharmaceuticals common stock held by nonaffiliates was $1,643,436.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. Common stock, par value
$.10; 4,135,162 shares outstanding as of the close of business on January 5,
1996.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Lee Pharmaceuticals is engaged in the research, development, purchase,
manufacture, and marketing of consumer personal care products and
professional dental products, all of which are targeted for the improved
well-being of the human body. The Company's business is directed to two main
areas: (a) the development and marketing of a range of consumer products
including nail extenders and strengtheners, depilatories, feminine hygiene
products and over-the-counter drug items and (b) the manufacture and sale of
materials and supplies for use in the professional dental health field. For
all years presented, revenues, operating results and identifiable assets of
the consumer products group were in excess of 90% of total company operations.
Lee Pharmaceuticals' executive offices are located at 1444 Santa Anita
Avenue, South El Monte, California 91733, and its telephone number is (818)
442-3141. The Company was incorporated in April 1971 as a California
corporation.
CONSUMER PRODUCTS SEGMENT
The Company's consumer products line consists primarily of a variety of
artificial fingernail extenders and related fingernail products. In addition,
the Company manufactures and sells hair removal and related feminine
products, antacid tablets, nasal care products, infant items and a variety of
over-the-counter drug products. The Company's product lines have been
developed internally, particularly in the case of fingernail products, and by
outside product line acquisitions.
In fiscal years 1993 and 1994, the research and development capability
of Lee Pharmaceuticals generated several new product entries, including Lee
Press-On Body Tattoos, Lee Brush-On Nail Bleach, Lee Nail Whitener and the
Lee Fancy Fingers Nail Jewelry Kit. In addition, the consumer products line
of the Company was further diversified by the acquisition of seven products
from other manufacturers, including six over-the-counter drug products and
Sundance, a line of skin care products.
In fiscal year 1995, the research and development capability of Lee
Pharmaceuticals generated several new product entries, including a new
product line -- Lee Press-On Nails - Professional Salon Style in fourteen
high fashion nail colors plus a nail extender product line known as Lee
Elegant Edge Nail Tip kits. In addition, there was further diversification of
the Company's consumer products line by the acquisition of products from
other manufacturers, including aloe vera skin care products, a line of men's
after shave lotions, infant care items and additional over-the-counter drug
products.
DOMESTIC CONSUMER PRODUCTS MARKETING
Consumer products are sold nationally, principally through major retail
drug, food and discount department store chains. Retail distribution is
primarily accomplished through a network of independent general merchandise
sales representatives. All lines are advertised in a variety of media,
including television, magazines and newspapers.
CONSUMER PRODUCTS COMPETITION
The Consumer Products Division of Lee Pharmaceuticals operates in a
highly competitive environment. In the area of fingernail extension, Lee
Pharmaceuticals competes with five to six companies of similar size and
financial resources.
Competition in the depilatory product category is intense, but
competitors are not as numerous as in the artificial fingernail field. The
acquisition of Zip Wax and Bikini Bare brands of hair removal products has
given Lee Pharmaceuticals two major brands in this category sub-segment.
Lee Pharmaceuticals continues to expand its product line via a
combination of acquisitions and in-house research and development activity.
The consumer products line today is dominated by nail extension, nail
treatment, and nail decor products, but it now includes depilatory products,
wax hair removal products, feminine deodorant products, a nailbiting
deterrent product, nasal care items, over-the-counter drug products, skin
care products and men's fragrance products. The Company's consumer products
line today is no longer restricted solely to the volatilities of the
cosmetics business.
REGULATION OF CONSUMER PRODUCTS
The Company's consumer products are regulated by the Food and Drug
Administration. The regulations deal principally with consumer safety and
with the effectiveness of the products for the purposes for which they are
proposed to be used. For many years, the cosmetic regulations were applied
only in cases of adulteration or misbranding. Under the Fair Packaging and
Labeling Act (1966), the FDA has moved to require new labeling data as to
ingredients in cosmetics.
The Company believes that all its cosmetic products are manufactured and
sold in compliance with the laws of each state and that no pre-marketing
clearance of its products is required from any state. The Company maintains a
comprehensive data file on each of its consumer products and believes that it
would be able to apply for any required clearances expeditiously if data were
ever required for its cosmetic products.
<PAGE>
3
To the extent the Company's products are marketed in foreign countries,
foreign laws are applicable as well as FDA regulations which control export
of cosmetics. To date, where regulations have been established by foreign
ministries of health which differ from those established in the United
States, the Company has been able to make acceptable substitutions. As a
result, marketing of the products has not been significantly impeded by
foreign regulations.
Material Safety Data Sheets (MSDS) are available on all its consumer
finished products. The MSDS's are supplied to the Company's customers.
All products for export shipped by air or sea which contain listed
hazardous materials meet United Nations Standards as of January 1991. The
requirements are based on the U.N.'s performance-oriented packaging (POP)
specifications found in the "Transport of Dangerous Goods" commonly called
"The Orange Book".
DENTAL PRODUCTS SEGMENT
From its inception in 1971 through 1995, the Company at various times
introduced dental products designed to satisfy specific material or supply
requirements of the practicing dental professional and of the orthodontic and
endodontic specialist.
Its dental product line consists of a variety of restorative materials
(filling materials, core build up materials, fissure sealants, etc.),
splints, orthodontic brackets, Maryland bridge adhesives, and enamel and
dentin bonding materials and related products.
In 1991, the Company licensed the right to certain patents and
technology developed by the American Dental Association Health Foundation
through research it sponsored at the Paffenbarger Center for Excellence in
Dental Research at the National Institute of Technology and Standards for
fabricating dental inserts and inlays of special formulas of beta quartz. The
Company has been marketing nine shapes and sizes, and is now introducing
twenty-six more sizes and shapes which are intended to offer the dentist
several new classes of restorations between amalgam and composite
restorations on the one hand, and laboratory inlays on the other hand. These
new beta quartz designs are intended to permit the dentist to prepare inlays
in one visit, directly at the chairside, without the need for time consuming
impressions, or the need for expensive laboratory work.
DENTAL MARKETING IN THE UNITED STATES
The Company markets its dental, orthodontic and endodontic products in
the United States through telephone solicitation, direct mail, advertisement
in trade journals, attendance at conventions, and dental dealers. The Company
plans and executes its own marketing programs, prepares its own technical
literature, produces its own clinical and marketing films, and regularly
displays its dental products at conventions throughout the country.
DENTAL MARKETING OUTSIDE THE UNITED STATES
The Company markets dental products outside the United States through
foreign dental distributors who either solicit individual dentists and
orthodontists and sell the Company's products to them directly for use in the
treatment of their patients, or sell through local dealers whom they engage
to sell the Company's products on their behalf. The Company plans and
executes its own international marketing programs and regularly displays its
dental products at international conventions.
DENTAL COMPETITION
The dental preventive and restorative materials industry is highly
competitive, and the Company's market share in the total industry is
insignificant. The Company competes with larger corporations which have
greater financial resources and believes other companies may enter this
field. The Company's principal competitors are 3M Dental Division, a division
of 3M; Kerr, a division of Sybron; L. D. Caulk Co., a division of Dentsply;
and Unitek, a division of 3M. The principal methods of competition are in the
area of product performance, technical assistance provided to the customer,
and price.
REGULATION OF DENTAL PRODUCTS
FOOD AND DRUG ADMINISTRATION
Dental materials are classified as devices under the Medical Device
Amendments of 1976 to the Federal Food, Drug and Cosmetic Act.
All the dental device products marketed by the Company were registered
as devices with the FDA at the mandatory time (December 31, 1977). All new
devices marketed after May 28, 1976, must be processed under the FDA
premarketing notification regulation (510 k) for determination of equivalency
to preenactment devices, or the product must be submitted as a new device
which requires providing considerable extra test data.
The Safe Medical Devices Act (SMDA) became law on November 28, 1990,
requiring all serious injuries and serious illness contributed to or caused
by medical devices to be reported to distributors, manufacturers and the FDA.
SMDA also requires all premarket submissions to the FDA to contain adequate
information on safety and effectiveness.
<PAGE>
4
As required by the FDA, the Company observes certain procedures and
policies in the manufacture, quality control, and after-sale monitoring of
performance for its products. Although the various criteria to be used by the
FDA in regulating devices have not been finalized, the Company believes that
all of its products and procedures comply with all current and anticipated
device regulations. Over half the Company's products fall into the FDA's
Class II classification which requires that those products must meet certain
performance standards. The Company believes that all affected products meet
all current performance standards.
For those products placed in Class II, final marketing approval from the
FDA is contingent on final acceptance of the Panel's findings and on
development of standards (in large part being done by the American Dental
Association). It is expected that, based upon current available information,
most of the Company's products will meet the standards currently anticipated;
for the products that do not meet the standards, the Company will have to
submit adequate data directly to the FDA. Failure to gain approval by the FDA
could impede the marketing of these devices to the point of removal from the
market until such time as clearance is obtained.
OTHER GOVERNMENTAL REGULATIONS
To the extent the Company's products are marketed in foreign countries,
the Company believes it has complied with the laws of such countries, and
with the FDA regulations which control export of devices. It is anticipated
that compliance with the FDA regulations will ensure compliance also with
applicable foreign laws and regulations, although certain foreign countries
could develop more restrictive laws and regulations that could impede the
Company's ability to market its dental products in foreign countries.
The Company believes that all its dental products are manufactured and
sold in compliance with the laws of each state and country to whom the
Company exports and that no premarketing clearance of its products is
required from any state.
DEPARTMENT OF TRANSPORTATION
The Materials Transportation Bureau administers the Hazardous Materials
Regulation, effective July 7, 1975. It has been ascertained that those dental
products and components marketed by the Company which fall within the
provisions of the regulations are brought into compliance by proper labeling
and/or filing for exemptions. The Company believes that it is in full
compliance with all bureau regulations applicable to its products and that
compliance with these regulations will not significantly impede the marketing
of its products.
APPLICABLE TO ALL SEGMENTS
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
YEAR ENDED SEPTEMBER 30
----------------------------
1995 1994 1993
------ ---- ----
(000) (000) (000)
United States export sales
(except Canada). . . . . . . . . . $1,161 $781 $880
RESEARCH PROGRAM
The Company conducts a research program to enhance its present products
and to develop new products. The members of the research staff devote a
majority of their time to development of new products and to production in
the areas of quality control and technical assistance. As needed, clinical
research on products is also done under contract with dental schools and
clinics. The Company follows the policy of expensing all research and
development costs when incurred. During the years ended September 30, 1995,
1994 and 1993, the Company spent approximately $186,000, $289,000 and
$248,000, respectively, on research activities relating to the development of
new products or the improvement of existing products.
RAW MATERIALS
The raw materials used by the Company in the manufacture of most of its
dental and consumer products are obtained from commercial sources where they
are presently available in sufficient quantities and are refined by the
Company as needed for use in its products. The Company generally carries
sufficient amounts of raw materials inventory to meet the delivery
requirements of customers.
PATENTS AND TRADEMARKS
The Company has adopted the policy of making patent disclosures on its
products and of filing applications for patents on the products or on aspects
of their manufacture or use when appropriate. The Company owns forty U.S.
patents, and owns the rights in a number of other U. S. patent applications
pending. A U.S. patent on sculptured nails has been granted. There are
currently ten foreign patents held by the Company. In addition, one design
patent has been granted for a nail buffer and for artificial nails. There is
no assurance that any of the patent applications will be granted or that, if
granted, the Company will be afforded any competitive advantages thereby. The
Company believes that, while patent protection is desirable in certain areas,
it is not essential; therefore, certain foreign patents have been abandoned
as not necessary to the interest of the Company. In addition to the forty
patents noted above, which apply to dental and consumer products, the Company
has been assigned three U.S. patents which relate to general epoxy chemistry.
Two of these may be used by the Epoxylite Corporation for other than medical
and dental products without the
<PAGE>
5
payment of any royalty or other consideration. United States trademarks for
the major dental products have been granted. Additional trademarks for other
products have been applied for, both in the U. S. and in foreign countries.
Trademarks for certain minor products, or in countries with minor market
potential, have been abandoned as not necessary to the interest of the
Company.
The Company has the right to use the name "Epoxylite" in connection with
the marketing and sale of its medical and dental products and owns the
trademark "Epoxylite" in medical and dental categories. The Epoxylite
Corporation owns the trademark "Epoxylite" in all other categories. The
trademark "Epoxylite" is registered for medical and dental classifications in
the U.S., Canada, Mexico, England, France, and numerous other countries. The
Company owns, or applications are pending for, trademarks for the names under
which each of its principal products is marketed.
CURRENT REGULATORY REGISTRATION
The Company is registered with the federal and State of California FDA
agencies as a manufacturer and distributor of Drugs, Medical Devices and
Cosmetics. The Company is also registered as a waste generator with the
Environmental Protection Agency (EPA).
ENVIRONMENTAL PROTECTION REGULATION AND LITIGATION
The Company believes that its manufacturing facilities are operated in
compliance with all federal, state and local provisions regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment.
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB"), has alleged that the soil and shallow groundwater at the site are
contaminated. On August 12, 1991, the Board issued a "Cleanup and Abatement
Order" directing the Company to conduct further testing and cleanup the site.
The Company did not complete the testing, and 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 onsite, and resulted from either past or current
operations on the property. While the Company may be liable for all or part
of the costs of remediating the contamination on its property, the
remediation cost is not known at this time. The EPA has not taken any further
action in this matter, but may do so in the future.
The Company and nearby property owners are in the process of engaging a
consultant to perform a site investigation with respect to soil and shallow
groundwater contamination. Based upon proposals received to date, the Company
currently estimates the cost to perform the site investigation to be
$175,000. Accordingly, while recognizing it may be jointly and severally
liable for the entire cost, the accompanying financial statements include the
proportionate amount ($87,500) which the Company believes is its liability
for a site investigation.
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 Company does not
believe there is any basis for the allegations and is vigorously defending
the lawsuit. The case name is DEL RAY INDUSTRIAL ENTERPRISES, INC. v.
ROBERT MALONE, ET AL., Los Angeles County Superior Court, Northwest District,
commenced August 21, 1991. In this action, the plaintiff alleges
environmental contamination by defendants of its property, and seeks a court
order preventing further contamination and monetary damages. The Company does
not believe there is any basis for the allegations and is vigorously
defending the lawsuit.
The Company's South El Monte manufacturing facility is also located over
a large area of possibly contaminated regional groundwater which is part of
the San Gabriel Valley Superfund site. The Company has been notified that it
is a potentially responsible party ("PRP") for the contamination. The cost of
any cleanup of the groundwater is not known at this time. In September 1992,
EPA announced that the levels of contamination in the Whittier Narrows area
of the Superfund site were sufficiently low and that it was not planning a
cleanup at this time, but rather would continue to monitor the groundwater
for an indefinite period. The Company's property is adjacent to the Whittier
Narrows area. Except as described above, it is not clear what action the EPA
will take with respect to the Company's property.
In August, 1995, the Company was informed that the EPA entered into an
Administrative Order on 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 is anticipated to take
eighteen to twenty-four months. The Company's share of the cost of the Study
is currently $15,000 which has been accrued for in the accompanying financial
statements.
The City of South El Monte, the city in which the Company has it's
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.
<PAGE>
6
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 Securities and Exchange Commission has issued a formal order of
investigation concerning certain matters, including the Company's
environmental liabilities. The Company is cooperating with the investigation.
Currently, the Company does not have any reliable information on the
likely cleanup costs of its property. Thus, it cannot determine the extent,
if any, of its share of liability for any such cleanup costs. The Company has
been seeking reimbursement of costs from its insurance carriers, who have
denied reimbursement of costs, based on their review and analysis of the
insurance policies, the history of the site, the nature of the claims and
current court decisions in such cases.
OTHER REGULATIONS
During the last several years, several state, local and federal agencies
have finalized or proposed regulations relating to hazardous materials. These
include Los Angeles County Hazardous Materials Business Plan, California and
federal OSHA "right to know" laws, EPA "community right to know" laws and
Extremely Hazardous Substance Regulations, Los Angeles County's program for
monitoring and closing underground tanks, the California Safe Drinking and
Toxic Enforcement Act of 1986 (Prop 65), California Connelly-Sterling Toxic
Hot Spots Information Act and AQMD's New Source of Carcinogenic Air
Contaminants (Rule 1401). The Company believes it is in compliance with these
regulations that are in effect and is anticipating it will be in compliance
with those of these acts yet to be finalized.
EMPLOYEES
The Company's work force of 92 presently includes 27 permanent
employees, both salaried and hourly, and 65 personnel leased through
employment agencies.
OTHER
The Company is not dependent upon any one supplier for any important raw
material item. Most raw material items are commodities and readily available
in the market. In most instances, the Company utilizes two or more suppliers
to furnish raw materials as needed. Sources are believed to be sufficient to
satisfy current and anticipated needs.
Demand for the Company's principal product line is not seasonal. The
depilatory line of products is, however, generally seasonal, with demand
significantly higher during the spring and summer months.
Although the Company does not believe that it is dependent upon any one
customer or distributor, a customer accounted for 7% and 10% of the Company's
net revenues during fiscal 1995 and 1994, respectively. No other customer
accounted for 10% or more of the Company's net revenues for those fiscal
years.
Backlog is not a significant factor in the Company's business. Most
orders are filled immediately and in any event, are cancelable under certain
conditions. There are no material contracts with distributors.
Consumer Products Division returns must include proof of purchase, sales
receipt and a written explanation of the reason for the return. The Company
generally provides credits for replacement of product, however, on occasion
it may provide a cash refund.
In addition, discontinued or overstocked items may be returned once the
customer receives a computer printed "return authorization" and "shipping
labels" for full case stock of factory fresh product to be sent freight
prepaid to the Company's warehouse. The customer will not receive credit for
additional merchandise that may have been added to the return. Also, the
Company issues a damaged merchandise allowance of 1/2 of 1% visibly deducted
on each and every invoice from the total net value of that invoice in lieu of
accepting returns of damaged merchandise. Finally, only 20% of the original
merchandise order of custom packed assortments is subject to return.
The Company's sales return policy for the Dental Division, is as
follows: "products returned to Lee Pharmaceuticals for credit must be sent
postage paid and within 90 days of purchase". Defective merchandise can be
replaced free of charge at any time prior to the date of expiration.
Excessively used or improperly stored merchandise is not eligible for
replacement.
<PAGE>
7
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company occupies, through ownership or lease, ten buildings on
contiguous lots in South El Monte, California. The Company owns the
following:
APPROXIMATE
SQUARE
ADDRESS FOOTAGE USAGE
- ------- ----------- -----
1428 Santa Anita Avenue 12,000 Chemical processing and filling
The Company leases the following:
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE LEASE
SQUARE ANNUAL EXPIRATION
ADDRESS FOOTAGE RENTAL DATE USAGE
- ------- ----------- --------- ---------- -----
<S> <C> <C> <C> <C>
1434 Santa Anita Avenue 11,000 $52,812 11/30/2000 Inventory control, purchasing,
personnel, data processing, accounting
offices and dental production/shipping
1460 Santa Anita Avenue (2) 15,000 64,728 11/30/2000 Executive office, consumer shipping and
paper printing
1470 Santa Anita Avenue 8,000 43,056 11/30/2000 Vacant, available for subleasing
1500 Santa Anita Avenue 18,000 85,884 11/30/2000 Warehouse, consumer packaging operations,
injection molding and corrugated printing
1516 Santa Anita Avenue 18,000 87,960 11/30/2000 Sales/marketing offices and warehouse
1444 Santa Anita Avenue (1) 10,000 62,508 11/30/2000 Executive office, research facility,
quality control and bottle printing
1427 Lidcombe Avenue 6,000 28,134 11/30/2000 Maintenance and chemical processing
(rear building)
1425 Lidcombe Avenue 6,000 28,134 11/30/2000 Chemical packaging
1445 Lidcombe Avenue (1) 8,000 58,680 11/30/2000 Effective November 8, 1995, the building
is being subleased on a one-year agreement.
The gross monthly rental income is $3,678.
</TABLE>
(1) This property is treated as a sale leaseback agreement between the
Company and one of its directors (former Chairman). The monthly
lease payments were set at the currently prevailing rates in the
area at the time the leases were written.
(2) The Company entered into a sublease agreement, effective January
15, 1996, which expires November 30, 2000. The gross annual rental
income is $57,250. The tenant occupies 13,000 square feet of the
total 15,000 square footage. In June 1998, the subleasee will
commence occupancy of the entire 15,000 square footage and the
monthly rent will be adjusted accordingly. The sublease includes a
cost of living adjustment in June 1998.
All of the Company's business segments use the properties owned or
leased by the Company except for 1470 Santa Anita Avenue (available for
subleasing) and 1445 Lidcombe Avenue which was vacated in August 1995 and
subleased effective November 8, 1995.
The Company has a right of first refusal to acquire most of the
buildings which it leases.
The Company believes that its existing facilities are adequate to enable
it to continue to produce its products at their present volume together with
any moderate increases thereto.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is involved from
time to time in litigation. In the opinion of management of the Company none
of the litigation currently pending will have a material effect on its
business or financial condition. See Item I -- "Applicable to all segments --
Environmental protection regulation and litigation" (including the SEC formal
investigation) for additional information concerning certain litigation and
an investigation by the Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE>
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
Lee Pharmaceuticals' common stock has been traded on the American Stock
Exchange since October 24, 1973. For the two most recent fiscal years, its
shares have closed at high and low trading prices as follows:
QTR HIGH LOW
FY 1995 1Q $ .9375 $ .4375
2Q 1.0000 .5000
3Q .6875 .4375
4Q .8750 .5000
FY 1994 1Q $3.5000 $1.6250
2Q 2.0625 1.3125
3Q 2.0000 1.0625
4Q 1.4375 .8125
The Company does not currently meet the guidelines for continued listing
of the Company's Common Stock on the American Stock Exchange. No assurances
can be given that the Company's Common Stock will continue to be traded on
the American Stock Exchange. The Company is exploring the possibility of
moving the trading of its stock to the over the counter market.
There were approximately 894 shareholders of record of the Company's
common stock as of the close of business on September 30, 1995.
The Company has not paid any cash dividends and has no present intention
of paying cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
Net revenues decreased during fiscal 1995 by $1,730,000 or 16% when
compared to fiscal 1994. The decrease in net revenues was the result of lower
sales volume of the Company's nail extender products. The decline in sales
revenue was caused by lower competitive pricing, contracting inventory levels
and customer consolidations by the retailers. The Company's percentage of
sales returns to gross revenues was basically constant when comparing fiscal
1995 and 1994. New product launches and brand acquisitions accounted for
approximately 6% of the total net revenues for fiscal 1995.
As noted under "Description of Business -- Consumer Products Segment" the
Company has pursued a policy of diversifying its product line and has
increasingly emphasized lower priced products. The overall economic recession
had some effect on the down turn in the Company's sales volume in fiscal 1995.
Cost of sales as a percentage of gross revenues increased during fiscal
1995 when compared to fiscal year 1994. The increased cost of sales
percentage (47% versus 41%) is attributed to bulk sales of slow moving
finished goods at lower than normal gross margins. Also the Company's charge
to cost of sales to increase the inventory obsolescence allowance amounted to
$485,000 or approximately 500 basis points of the fiscal year cost of sales
percentage increase (47% versus 41%).
Selling and advertising expenses decreased $1,047,000 or 20% when
comparing fiscal year 1995 and 1994. The cost reductions occurred in several
major expense classifications, namely: 1) decrease in payroll and related
fringe benefits due to cutbacks of personnel, 2) decline in advertising
promotion costs, 3) lower manufacturer representative commissions (lower
sales volume) and 4) lower consulting and amortization expenses.
Research and development expenses decreased $103,000 (36%) to $186,000
for 1995, as compared to $289,000 at September 30, 1994. A reduction in
personnel and related fringe benefit costs explains the reduction in
expenditures. The recent Company trend has been in the direction of brand
acquisitions rather than extensive internal research and development.
General and administrative expenses remained constant when comparing
fiscal year 1995 and 1994. When comparing fiscal year 1995 and 1994, the
following key expense categories decreased; salaries and wages plus related
fringe benefits ($152,000), legal ($27,000), and insurance ($17,000). The
reduction in expenses were offset primarily by increases for an environmental
cleanup accrual ($102,500) and a write off of an affiliate receivable
($83,000).
<PAGE>
9
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $1,260,000 at September 30, 1995, as compared with
$3,042,000 at September 30, 1994. The ratio of current assets to current
liabilities was 1.3 to 1 at September 30, 1995 and 2.0 to 1 at September 30,
1994. The decrease in working capital during fiscal 1995 primarily resulted
from a decrease in inventory levels ($962,000) as a result of scrapping
excess packaging components. Also, the Company's accounts payable and
payables due to related parties increased $358,000 and $223,000,
respectively. The decrease in current ratio during 1995 compared to 1994
resulted primarily from: 1) a real estate bank loan (approximately $289,000)
which becomes due in March 1996, 2) the increase in inventory obsolescence
allowance of $485,000 and 3) the recognition and recording of the remaining
current portion ($660,000) of the long term liabilities related to prior
brands acquisitions. Accounts and notes payable (current) increased
($935,000) from 1994 to 1995. Accounts payable as a percentage of total costs
and expenses increased to 16% from 11% when comparing fiscal years 1995
versus 1994. The accounts receivable turnover has remained relatively
constant when comparing fiscal year 1995 and 1994.
In fiscal 1995, the Company received additional cash advances from the
Company's Chairman. The additional borrowing was obtained for the continued
payment to suppliers. The Company extended the repayment terms of several
notes prior to their maturity during fiscal 1995.
Customer consolidations, as expected, materialized in fiscal 1995 and
will, no doubt, continue in fiscal 1996. Management continues to face lower
retail store inventory levels and expanded computerization (EDI - electronic
data interchange) in the field.
The Company has an accumulated deficit of $4,805,000. The Company's
recurring losses from operations and inability to generate sufficient cash
flow from normal operations to meet its obligations as they came due raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue in existence is dependent upon future
developments, including obtaining additional financing and achieving a level
of profitable operations sufficient to enable it to meet its obligations as
they become due.
In order to increase its working capital, the Company developed the
following financial plan. The Company has taken steps to conserve cash by
reducing its occupied facility square footage by 25% since August 1995. The
lease on a 7,000 square foot facility was canceled by paying a six (6) month
advance rent buyout. Two other facilities were vacated and will be subleased
during fiscal 1996. One subleasee took occupancy of a building in November of
1995, and the second building will be occupied in January 1996. The amount of
rental income will be slightly less than the Company's current monthly rent
expense related to these buildings. The total annualized economic savings via
the lease buyout and rental income on the two buildings is approximately
$133,000. Additionally, the Company is conducting a review of its
inventory and is diligently working to reduced the amount of working capital
tied up in inventory. The Company reduced its gross inventory level during
fiscal 1995 by approximately $477,000, exclusive of material scrapped from
inventory. Plus, the Company is reviewing proposals from finance companies
regarding the possibility of them making a loan secured by the Company's
accounts receivable, inventory and equipment. The Company is hopeful that
this funding will be available should the need arise. Also, the renegotiation
of the Company's real estate loan ($289,000) which matures in March, 1996 is
underway. No assurances can be given that the Company's efforts in this
regard will be successful.
The Company does not believe that inflation had a significant impact on
its operations during fiscal years 1995 and 1994.
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER
<S> <C>
Independent Auditors' Reports 10-11
Financial Statements:
Balance sheet as of September 30, 1995 12
Statements of operations for each of the years in the two-year
period ended September 30, 1995 13
Statements of changes in stockholders' equity (deficiency) for each
of the years in the two-year period ended September 30, 1995 14
Statements of cash flows for each of the years in the two-year
period ended September 30, 1995 15
Notes to financial statements 16-23
</TABLE>
All schedules not filed or included herein are omitted either because
they are not applicable or not required, or the required information is
included in the financial statements or notes thereto.
<PAGE>
10
GEORGE BRENNER
CERTIFIED PUBLIC ACCOUNTANT
9300 WILSHIRE BOULEVARD, SUITE 480
BEVERLY HILLS, CALIFORNIA 90212
Independent Auditor's Report
Board of Directors
Lee Pharmaceuticals
South El Monte, California
I have audited the accompanying balance sheet of Lee Pharmaceuticals as of
September 30, 1995 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based
on my audit. The financial statements of Lee Pharmaceuticals for the period
ending September 30, 1994 were audited by other auditors whose report
thereon dated December 6, 1994 expressed an unqualified opinion on those
statements.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lee Pharmaceuticals as
of September 30, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1
to the financial statements, the Company's recurring losses from operations
and inability to generate sufficient cash flow from normal operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Notes 1
and 15. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern.
As discussed in Note 10 to the financial statements, the Company is
involved in various matters involving environmental cleanup issues. The
Company is presently planning and/or participating in remedial cost studies
and has made the appropriate provision in the financial statements for the
cost of these studies. However, the ultimate outcome of these matters
cannot presently be determined. Accordingly, no provision for any loss that
may result from the resolution of these matters has been made in the
accompanying financial statements.
Very truly yours,
GEORGE BRENNER
George Brenner, CPA
January 6, 1996
Beverly Hills, California
<PAGE>
11
MEIR & MEIR
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditor's Report
Board of Directors
Lee Pharmaceuticals
South El Monte, California
We have audited the statements of operations, changes in stockholders'
equity, and cash flows of Lee Pharmaceuticals for the year ended September
30, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentations. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lee
Pharmaceuticals for the year ended September 30, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 10 to the financial statements, the Company is involved
in various matters involving environmental cleanup issues. The ultimate
outcome of these matters cannot presently be determined. Accordingly, no
provision for any loss that may result from the resolution of these matters
has been made in the accompanying financial statements.
MEIR & MEIR
December 6, 1994
139 South Beverly Drive, Suite 204 Beverly Hills, CA 90212
Tel: (310) 274-7541 Fax: (310) 274-1015
<PAGE>
12
LEE PHARMACEUTICALS
BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
CURRENT ASSETS (Note 6F):
Cash.......................................................... $ 123,000
Accounts receivable, less allowance for doubtful accounts
of $141,000 and sales returns allowance of $243,000......... 1,331,000
Inventories (Note 4).......................................... 2,460,000
Other current assets.......................................... 1,087,000
-----------
TOTAL CURRENT ASSETS........................................ 5,001,000
-----------
PROPERTY, PLANT AND EQUIPMENT, AT COST (Notes 5 and 6F):
Land.......................................................... 49,000
Building...................................................... 204,000
Machinery and equipment....................................... 6,531,000
Leasehold improvements........................................ 322,000
-----------
7,106,000
Less accumulated depreciation and amortization................ 6,519,000
-----------
NET PROPERTY, PLANT AND EQUIPMENT........................... 587,000
-----------
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization
of $2,558,000 (Notes 3, 6F and 8)............................. 3,127,000
-----------
TOTAL........................................................... $ 8,715,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank (Note 5)................................. $ 289,000
Notes payable, other (Note 8)................................. 165,000
Current portion - royalty agreements (Note 2)................. 743,000
Accounts payable.............................................. 1,636,000
Other accrued liabilities..................................... 455,000
Due to related parties (Note 7)............................... 388,000
Deferred income (Note 7)...................................... 65,000
-----------
TOTAL CURRENT LIABILITIES................................... 3,741,000
LONG-TERM NOTES PAYABLE TO RELATED PARTIES (Note 6)............. 3,346,000
LONG-TERM PAYABLE - royalty agreements, less current
portion $743,000 (Note 2)..................................... 1,525,000
DEFERRED INCOME (Note 7)........................................ 273,000
-----------
TOTAL LIABILITIES............................................. 8,885,000
-----------
SUBSEQUENT EVENT (Note 15)
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' DEFICIENCY (Notes 11 and 13):
Common stock, $.10 par value; authorized 7,500,000 shares;
issued and outstanding, 4,135,162 shares.................... 413,000
Additional paid-in capital.................................... 4,222,000
Accumulated deficit (Note 1).................................. (4,805,000)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY.............................. (170,000)
-----------
TOTAL........................................................... $ 8,715,000
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
13
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
1995 1994
----------- -----------
GROSS REVENUES................................... $10,053,000 $11,915,000
Less: Sales returns, discounts
and allowances............................... (914,000) (1,046,000)
----------- -----------
NET REVENUES..................................... 9,139,000 10,869,000
----------- -----------
COSTS AND EXPENSES:
Cost of sales.................................. 4,762,000 4,884,000
Selling and advertising........................ 4,077,000 5,124,000
General and administrative..................... 1,110,000 1,114,000
Research and development....................... 186,000 289,000
----------- -----------
TOTAL COSTS AND EXPENSES......................... 10,135,000 11,411,000
----------- -----------
OPERATING LOSS................................... (996,000) (542,000)
INTEREST EXPENSE................................. (363,000) (238,000)
INTEREST INCOME.................................. -- 24,000
GAIN ON SALE OF BUILDINGS AND OTHER (Note 7)..... 65,000 67,000
OTHER INCOME..................................... 12,000 26,000
----------- -----------
NET LOSS......................................... $(1,282,000) $ (663,000)
=========== ===========
PER SHARE:
Net loss....................................... $ (.31) $ (.16)
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
14
LEE PHARMACEUTICALS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ ADDITIONAL EARNINGS
NUMBER OF PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 4,135,162 $413,000 $4,222,000 $(2,860,000) $ 1,775,000
Net loss (663,000) (663,000)
--------- -------- ---------- ------------ -----------
Balance at September 30, 1994 4,135,162 413,000 4,222,000 (3,523,000) 1,112,000
Net loss (1,282,000) (1,282,000)
--------- -------- ---------- ------------ -----------
Balance at September 30, 1995 4,135,162 $413,000 $4,222,000 $(4,805,000) $ (170,000)
========= ======== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
15
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
1995 1994
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(1,282,000) $(663,000)
----------- ---------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation................................... 249,000 391,000
Amortization of intangibles.................... 245,000 216,000
(Gain) on disposal of property, plant
and equipment................................ (19,000) (1,000)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable..... (398,000) 696,000
Decrease (increase) in inventories............. 962,000 (42,000)
Decrease (increase) in other current assets.... 278,000 (420,000)
Increase in accounts payable................... 358,000 180,000
Increase (decrease) in accounts payable,
related party................................ 223,000 (316,000)
Increase in note payable bank.................. 289,000 --
Increase in notes payable - other.............. 65,000 100,000
(Decrease) in customer advances and deposits... (26,000) (109,000)
(Decrease) in accrued salaries and wages....... (48,000) (10,000)
(Decrease) in other accrued liabilities........ (170,000) (122,000)
Increase in accrued royalties.................. 83,000 --
(Decrease) in deferred income.................. (65,000) (189,000)
----------- ---------
Total adjustments.............................. 2,026,000 374,000
----------- ---------
Net cash provided by (used in) operating
activities................................. 744,000 (289,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment..... (98,000) (300,000)
Proceeds from sale of equipment................ 26,000 1,000
Acquisition of product brands.................. (552,000) (101,000)
----------- ---------
Net cash (used in) investing activities...... (624,000) (400,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank loans......................... (296,000) (7,000)
Proceeds from notes payable to related party... 193,000 510,000
----------- ---------
Net cash (used in) provided by financing
activities................................. (103,000) 503,000
----------- ---------
NET INCREASE (DECREASE) IN CASH.................. 17,000 (186,000)
Cash, beginning of year.......................... 106,000 292,000
----------- ---------
Cash, end of year................................ $ 123,000 $ 106,000
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) during the year for:
Interest....................................... $ 138,000 $ 181,000
Taxes.......................................... -- $ (43,000)
The accompanying notes are an integral part of the financial statements.
<PAGE>
16
LEE PHARMACEUTICALS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company manufactures and markets consumer products to
national and regional retailers of varying financial strength.
The Company also manufactures and sells dental products to
dental service providers principally in the United States.
For all years presented, sales, operating results and
identifiable assets of the consumer products group were in
excess of 87% of total company operations.
CONTINUED EXISTENCE
The financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has an
accumulated deficit of $4,805,000. The Company's recurring
losses from operations and inability to generate sufficient
cash flow from normal operations to meet its obligations as
they came due raise substantial doubt about the Company's
ability to continue as a going concern. The Company's ability
to continue in existence is dependent upon future
developments, including obtaining additional financing and
achieving a level of profitable operations sufficient to
enable it to meet its obligations as they become due.
Management's plans in regard to these matters are described in
Note 15 -- "Subsequent Events." The financial statements do
not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a
going concern.
INVENTORIES
Inventories are stated at the lower of average cost or market
using the first-in, first-out method.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are depreciated using the
straight-line method over estimated useful lives of three to
ten years for machinery and equipment and building
improvements and thirty-one years for the building. Leasehold
improvements are amortized over the shorter of the estimated
useful lives of the assets or the related lease term.
The excess of acquisition costs over the fair value of certain
assets acquired is being amortized over forty years. Covenants
not to compete are being amortized over three to five years,
which is the term of the related agreements. Amortization is
provided using the straight-line method.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to an existing
condition caused by past operations, and which do not
contribute to current or future revenue generation, are
expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or
cleanups are probable, and the costs can be reasonably
estimated. See Note 10 -- "Assessment for environmental
cleanup."
MAJOR CUSTOMER
The Company had one major customer with sales volume
approximating 7% and 10% of the Company's net revenues for the
years ending September 30, 1995 and 1994, respectively. The
amount due from the customer was $118,000 and $278,000 at
September 30, 1995 and 1994, respectively, and is included in
accounts receivable in these financial statements.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and trade
receivables. The Company places its cash with high credit
quality financial institutions. At times such investments may
be in excess of the FDIC limit. In regards to trade
receivables, the risk is limited due to the large number of
customers comprising the customer base, and the dispersion in
different industries and geographies.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of
common shares outstanding which were 4,135,162 in 1995 and
1994. Common stock equivalents (common stock options) for
fiscal 1995 and 1994 were not considered in the net loss per
share computations since the effect was anti-dilutive.
<PAGE>
17
ACCUMULATED DEFICIT
The Company has experienced recurring losses from operations.
Management plans to fund any potential additions to the
deficit by borrowing from various sources. See Note 15 --
"Subsequent Events."
NOTE 2 - CHANGE IN ACCOUNTING POLICY
The Company has changed its method of accounting for royalty
agreements in connection with brand acquisitions. Minimum
royalty obligations that are fixed and certain in amount are
"grossed up" and recorded as liabilities. The related
intangible assets acquired are amortized over the life of the
royalty agreement. This change which is a grossing up of
assets and liabilities, in equal amounts, has no effect on the
statements of operations.
Certain reclassifications have been made in the Statement of
Cash Flows for the year ending September 30, 1994 to make the
statement comparable to the September 30, 1995 presentation.
NOTE 3 - INTANGIBLE ASSETS
The Company acquired certain product lines in 1995 (See Note
14) and prior years. Certain amounts related to these
acquisitions were allocated to intangible assets. Included in
intangible and other assets at September 30, 1995 are the
following intangible assets:
Goodwill $1,373,000
Covenants not to compete 1,388,000
Trademark 322,000
Royalty agreements 2,276,000
Other 326,000
----------
Total 5,685,000
Less: accumulated amortization (2,558,000)
----------
Intangibles - Net $3,127,000
==========
NOTE 4 - INVENTORIES
Inventories consist of the following at September 30,
1995:
Raw materials $2,185,000
Work-in-process 416,000
Finished goods 485,000
----------
3,086,000
Allowance for obsolescence (626,000)
----------
Total $2,460,000
==========
NOTE 5 - NOTE PAYABLE TO BANK
Note payable to bank, secured by a deed on land and building,
requires monthly payment of $3,900, including interest at the
bank's reference rate plus 2%, maturing March 1996. At
September 30, 1995, the interest rate was 13.75%. The note is
guaranteed by the former Chairman of the Company. The Company
is going through the renegotiations with the bank regarding
this real estate loan. See Note 15 -- "Subsequent Events."
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
<TABLE>
<S> <C> <C>
A. Notes payable to related parties, unsecured, bearing
interest at bank's prime rate (8.75% at September 30,
1995), maturing January 2005. $90,000
B. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995),
principal is maturing and accrued interest is payable
in January 2005. 193,000
C. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995), principal
is maturing and accrued interest is payable in January
2005. 150,000
D. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995), principal
is maturing and accrued interest is payable in January
2005. 371,000
</TABLE>
<PAGE>
18
<TABLE>
<S> <C> <C>
E. Notes payable to related party, secured by product brand,
bearing interest at bank's prime rate (8.75% at September 30,
1995), principal is maturing and accrued interest is payable
in January 2005. 400,000
F. Note payable to related party, secured by assets of the
Company, bearing interest at bank's prime rate (8.75% at
September 30, 1995) and principal payable based on a twelve
(12) year fully amortized schedule commencing March 15, 1997. 1,440,000
G. Notes payable to officer, secured by product brand,
bearing interest at bank's prime rate (8.75% at September 30,
1995), principal is maturing and accrued interest is payable
in January 2005. 250,000
H. Note payable to officer, secured by product brand,
bearing interest at bank's prime rate (8.75% at September 30,
1995), principal is maturing and accrued interest is payable
in January 2005. 100,000
I. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995), principal
is maturing and accrued interest is payable in July 1998. 129,000
J. Note payable to officer, secured by product brand,
bearing interest at bank's prime rate (8.75% at September 30,
1995), principal is maturing and accrued interest is payable
in March 1997. 38,000
K. Note payable to related party, unsecured, bearing interest
at bank's prime rate (8.75% at September 30, 1995), maturing
January 1997. 10,000
L. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995), principal
is maturing and accrued interest payable in November 1997. 20,000
M. Note payable to officer, unsecured, bearing interest at
bank's prime rate (8.75% at September 30, 1995), principal
is maturing and accrued interest is payable in January 2005.
The original note was $250,000 and the Company made principal
installment payments during fiscal 1995 in the amount of
$95,000. 155,000
----------
$3,346,000
==========
</TABLE>
The Company's Chairman retired in April 1995. The above
referenced notes B, C, D, G, H and M are payable to the
Company's retired officer.
At September 30, 1995, the Company was committed to the
following minimum principal payments.
MINIMUM
YEAR ENDING PRINCIPAL
SEPTEMBER 30, PAYMENT
------------ ----------
1996 -0-
1997 132,000
1998 269,000
1999 120,000
2000 120,000
Thereafter 2,705,000
----------
Total $3,346,000
==========
NOTE 7 - RELATED PARTY TRANSACTIONS
In 1991, the Company sold and leased back two of its operating
facilities in a transaction with its Chairman. An initial
gain was recognized and a deferred gain was recorded which is
to be amortized over the term of the two leases which expire
November 2000. The amount of deferred gain recognized during
1995 and 1994 was $65,000.
During the fiscal year ending September 30, 1995, the total
interest expensed to related parties (Note 6) was $291,000 out
of which $66,000 was paid and $318,000 was accrued as of
September 30, 1995.
<PAGE>
19
There were no consulting fees charged by the Chairman's firm
during fiscal year ending September 30, 1995. During fiscal
year 1995 the Company paid the $38,000, which was payable as
of September 30, 1994. In April 1995, the Chairman retired.
He will continue as a director of the Company. The Chairman
(thru April 1995) is a majority shareholder with a freight
consulting firm. During the fiscal year ending September 30,
1994, the Chairman's firm provided the Company with analysis
of freight shipments and development of expert system type
computer programs for traffic management. The total
consulting fees approximated $113,000 for the year ended
September 30, 1994.
The Company's primary agent for purchasing television
advertising is Western International Media Corp. (WIMC) whose
President and Chief Executive Officer, Dennis F. Holt, was a
Director of the Company during 1995. Agency and advertisement
expenses in connection with (WIMC) were $204,000 and $61,000
for the years ended September 30, 1995 and 1994, respectively.
Amounts owed to WIMC by the Company at September 30, 1995 were
$153,000. See Note 15 -- "Subsequent Events."
NOTE 8 - NOTES PAYABLE - OTHER
<TABLE>
<S> <C> <C>
A. Note payable secured by product brand, bearing interest at
15%, interest payable monthly, maturing July 1996. $ 50,000
B. Note payable secured by product brand, bearing interest at
15%, interest payable monthly, maturing July 1996. 50,000
C. Installment note payable related to a consulting
agreement of a brand acquisition, bearing interest at 10%,
calling for monthly payments of $5,000 plus accrued interest,
commencing September 1, 1995 and maturing November 1, 1996. 65,000
----------
$ 165,000
==========
</TABLE>
NOTE 9 - FOURTH QUARTER RESULTS
The Company increased its fourth quarter, ended September 30,
1995, unaudited operating loss by $601,000 due primarily to:
1) increased inventory obsolescence allowance of $355,000, 2)
accrual for estimated environmental remediation costs of
$102,500 and 3) a write off of an affiliate receivable of
approximately $83,000. The fourth quarter ended September 30,
1995 operating loss (including the above) was approximately
$885,000.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At September 30, 1995, the Company was committed to its
former Chairman and to others under noncancelable operating
leases for land and buildings requiring minimum annual rentals
as follows:
YEAR ENDING
SEPTEMBER 30, OTHERS CHAIRMAN
------------ ---------- --------
1996 391,000 121,000
1997 391,000 121,000
1998 391,000 121,000
1999 391,000 121,000
2000 391,000 121,000
Thereafter 65,000 20,000
---------- --------
Total $2,020,000 $625,000
========== ========
Generally, the leases provide that maintenance, insurance and
a portion of property taxes are to be paid by the Company.
The Company also has a right of first refusal to acquire most
of the buildings which it leases. The Company's rental
expense for the years ended September 30, 1995 and 1994 was
$552,000 and $547,000, respectively. The amount of rent paid
to the Company's former Chairman was $147,000 and $105,000 for
the years ended September 30, 1995 and 1994, respectively.
<PAGE>
20
ASSESSMENT FOR ENVIRONMENTAL CLEANUP
The Company owns a manufacturing facility located in South El
Monte, California. The California Regional Water Quality
Control Board (The "RWQCB"), has alleged that the soil and
shallow groundwater at the site are contaminated. On August
12, 1991, the Board issued a "Cleanup and Abatement Order"
directing the Company to conduct further testing and cleanup
the site. The Company did not complete the testing, and 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 onsite, and resulted from either past or current
operations on the property. While the Company may be liable
for all or part of the costs of remediating the contamination
on its property, the remediation cost is not known at this
time. The EPA has not taken any further action in this
matter, but may do so in the future.
The Company and nearby property owners are in the process of
engaging a consultant to perform a site investigation with
respect to soil and shallow groundwater contamination. Based
upon proposals received to date, the Company currently
estimates the cost to perform the site investigation to be
$175,000. Accordingly, while recognizing it may be jointly
and severally liable for the entire cost, the accompanying
financial statements include the proportionate amount
($87,500) which the Company believes is its liability for a
site investigation.
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 Company does not believe there is any basis for
the allegations and is vigorously defending the lawsuit. The
case name is DEL RAY INDUSTRIAL ENTERPRISES, INC. v.
ROBERT MALONE, ET AL., Los Angeles County Superior Court,
Northwest District, commenced August 21, 1991. In this
action, the plaintiff alleges environmental contamination by
defendants of its property, and seeks a court order preventing
further contamination and monetary damages. The Company does
not believe there is any basis for the allegations and is
vigorously defending the lawsuit.
The Company's South El Monte manufacturing facility is also
located over a large area of possibly contaminated regional
groundwater which is part of the San Gabriel Valley Superfund
site. The Company has been notified that it is a potentially
responsible party ("PRP") for the contamination. The cost of
any cleanup of the groundwater is not known at this time. In
September 1992, EPA announced that the levels of contamination
in the Whittier Narrows area of the Superfund site were
sufficiently low and that it was not planning a cleanup at
this time, but rather would continue to monitor the
groundwater for an indefinite period. The Company's property
is adjacent to the Whittier Narrows area. Except as described
above, it is not clear what action the EPA will take with
respect to the Company's property.
In August, 1995, the Company was informed that the EPA entered
into an Administrative Order on 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 is anticipated to take
eighteen to twenty-four months. The Company's share of the
cost of the Study is currently $15,000 which has been accrued
for in the accompanying financial statements.
The City of South El Monte, the city in which the Company has
it's 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 Securities and Exchange Commission has issued a formal
order of investigation concerning certain matters, including
the Company's environmental liabilities. The Company is
cooperating with the investigation.
Currently, the Company does not have any reliable information
on the likely cleanup costs of its property. Thus, it cannot
determine the extent, if any, of its share of liability for
any such costs. The Company has been seeking reimbursement
of costs from its insurance carriers, who have denied
reimbursement of costs, based on their review and analysis of
the insurance policies, the history of the site, the nature of
the claims and current court decisions in such cases.
<PAGE>
21
OTHER COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in, or is otherwise
a party to, several other lawsuits, claims and legal
proceedings arising out of the conduct of its business,
including those related to commercial transactions and other
safety matters. While the ultimate results of these lawsuits
and other proceedings against the Company cannot be predicted
with certainty, after considering all relevant facts and the
opinion of outside counsel, management of the Company believes
such matters will not have a material effect on the financial
position of the Company.
NOTE 11 - STOCK OPTIONS
Under the Company's 1985 Employee Incentive Stock Option Plan,
as amended, common stock options may be granted to officers
and other key employees for the purchase of up to a total of
580,000 shares of common stock of the Company at a price per
share equal to its fair market value on the date of grant.
Options expire five years from the date of grant, are
contingent upon continued employment and become exercisable in
equal installments during each of the three years beginning
eighteen months after the date of grant.
The following table sets forth the number of shares under
option and the related option prices at September 30, 1994 and
1995:
OPTION PRICE RANGE
NUMBER PER SHARE
-------- ------------------
Outstanding at September 30, 1993 462,000 $1.25 -- $4.13
Granted 204,000 $1.31 -- $1.44
Canceled (94,000) $3.75 -- $4.13
--------
Outstanding at September 30, 1994 572,000 $1.25 -- $4.13
Granted 165,000 $0.50
Canceled (270,000) $1.25 -- $2.07
--------
Outstanding at September 30, 1995 467,000 $0.50 -- $1.31
========
At September 30, 1995, 204,000 shares are eligible to be
exercised and 113,000 shares are available for future grants
under the plan.
The 1987 Stock Option Plan was adopted by the Board of
Directors on January 4, 1988 and was approved by the Company's
shareholders on March 8, 1988. This Stock Option Plan
provides for the granting of options to the Company's outside
directors for the purchase of a total of 50,000 shares of
common stock of the Company at a price per share equal to the
fair market value on the date of grant. Options expire five
years from the date of grant and become exercisable in equal
installments during each of the three years beginning eighteen
months after the date of grant.
At September 30, 1995, options to purchase 50,000 shares were
outstanding and 12,000 shares are eligible to be exercised at
a price of $1.31 per share.
NOTE 12 - INCOME TAXES
As of September 30, 1995, the Company had net operating loss
carryforwards of approximately $5,700,000 for Federal and
$3,300,000 for California which for tax purposes can be used
to offset future Federal and California income taxes. The
differences in the state carryforwards relate primarily to the
treatment of loss carryforwards and depreciation of property,
plant and equipment. The carryforwards expire from 2003
through 2010.
NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company established an Employee Stock Ownership Plan and
Trust ("Plan"). The Plan is a tax-qualified employee stock
ownership plan which is designed to invest primarily in the
common stock of the Company for the benefit of the employees
and their beneficiaries.
The benefits provided by the Plan are paid for entirely by the
Company. The Company contributions are used to purchase the
common stock of the Company which is credited to the
individual accounts maintained for each participant. For each
twelve-consecutive-month period of employment, employees
receive a one-year period of service credit. After three
years of service employees have a 20% vested interest in their
accounts under the Plan, increasing at a rate of 20% per year
with full vesting occurring at seven years of service.
<PAGE>
22
The Plan consists of a stock bonus plan, ("Plan A") and a
money purchase pension plan, ("Plan B"). Under Plan A, the
Company's Board of Directors annually determines the amount to
be contributed to the Plan. The contribution by the Company
for any single plan year (October 1 through September 30)
cannot exceed fifteen percent (15%) of the total compensation
paid to Plan participants for the year. Plan B requires an
automatic contribution equal to ten percent (10%) of
participant compensation each Plan Year. The Company did not
make any contributions (expense) related to Plan A for the
year ending September 30, 1995 or September 30, 1994.
Effective June 30, 1993, Plan B was canceled; therefore, there
was no contribution under Plan B for the year ended September
30, 1995 or for the period October 1, 1993 through September
30, 1994. All participants under Plan B became 100% vested on
July 1, 1993 due to the cancelation of Plan B.
Effective September 30, 1995, Plan A was canceled. All
participants under Plan A became 100% vested on September 30,
1995 due to the cancelation of Plan A.
NOTE 14 - ACQUISITIONS
On October 1, 1993, the Company purchased certain assets
related to an over-the-counter (OTC) personal care product,
from Medtech Laboratories, Inc. of Jackson, Wyoming for
$100,000. In addition, the Company signed a licensing and
royalty agreement to pay Rumson Laboratories, Inc. of Red
Bank, New Jersey a royalty based on net sales of the acquired
brand. The agreement expires on September 30, 1999.
According to the agreement the Company paid $50,000 in cash as
an initial license fee. In addition, the annual royalty
payment is $100,000 per year. The aggregate royalty over the
six (6) year period totals $600,000. The total of $650,000
for royalty and license fee will be expensed over the terms of
the agreement.
On August 31, 1994, the Company entered into an agreement to
purchase certain assets of the "WATE-ON-R-" and "SUPER
WATE-ON-R-" line of nutritional products from The Fleetwood
Company for approximately $67,000 in cash. In addition,
the Company remitted $100,000 to the seller which was due
upon closing. A royalty agreement was entered into whereby
the Company is required to remit approximately $6,900 per month
for thirty-six months. The royalty amount is to be expensed
over the length of the agreement which terminates on August 31,
1999.
On August 31, 1994, the Company entered into an agreement to
purchase certain assets of the Aloe E and Aloe 99 line of aloe
vera products from Alivio Products, Inc. for approximately
$50,000 in cash. A royalty agreement was entered into whereby
the Company is required to remit $120,000 which is payable
over a twelve month period commencing on September 30, 1994
and continuing on the last of each month for the next eleven
(11) months.
On June 15, 1995, the Company purchased certain assets of the
Brush 'n Floss-R- product which is a patented device to
facilitate tooth flossing from Sundance Healthcare Products,
Inc. for approximately $24,000 cash. The purchase price
($24,000) includes a $20,000 prepayment of a five year royalty
which is being expensed monthly commencing July, 1995.
On June 30, 1995, the Company purchased certain assets of the
Baby Gasz-TM- and Baby Gumz-TM- brand of baby products from
Reinhard Labs, Inc. for approximately $73,000 cash. The Company
signed a consulting agreement whereby the Company prepaid the
three (3) year consulting fee ($60,000) which is included in
the $73,000 purchase price. The consulting fee is expensed
monthly commencing July 1, 1995 thru June 30, 1998. The
royalty agreement is for a period of five (5) years,
commencing July 1, 1995, and is based on 10% of net sales.
The royalty payments are payable thirty (30) days after each
calendar quarter.
On August 10, 1995, the Company purchased certain assets of
the XS-R- line of hangover relief/over indulgence products from
Barnett Laboratories, Inc. for approximately $129,000. In
addition, the Company signed a consulting agreement to pay
Barnett Laboratories, Inc. $75,000. The Company is required
to remit $5,000 per month, commencing on September 1, 1995,
plus accrued interest at 10%. The payments will continue for
the next fifteen (15) months. The royalty agreement covers a
period of sixty-four and two-thirds (64 2/3) months,
commencing August 10, 1995, and is payable thirty (30) days
after each quarter. The royalty agreement is based on 25% of
net sales.
NOTE 15 - SUBSEQUENT EVENTS
In order to increase its working capital, the Company
developed the following financial plan. The Company has taken
steps to conserve cash by reducing its occupied facility
square footage by 25% since August 1995. The lease on a 7,000
square foot facility was canceled by paying a six (6) month
advance rent buyout. Two other facilities were vacated and
will be subleased during fiscal 1996. One subleasee took
occupancy of a building in November 1995 and the second
building will be occupied in January 1996. The amount of
rental income will be slightly less than the Company's current
monthly rent expense related to these buildings. The total
annualized economic savings via the lease buyout and rental
income on the two buildings is approximately $133,000.
Additionally, the Company is conducting a review of its
inventory and is diligently working to reduce the amount of
working capital tied up in inventory. The Company reduced its
gross inventory level during fiscal 1995 by approximately
$477,000, exclusive
<PAGE>
23
of material scrapped from inventory. Plus, the Company is
reviewing proposals from finance companies regarding the
possibility of them making a loan secured by the Company's
accounts receivable, inventory and equipment. The Company is
hopeful that this funding will be available should the need
arise. Also, the renegotiation of the Company real estate
loan ($289,000) which matures in March, 1996 is underway.
Effective October 12, 1995, Mr. Holt resigned from the
Company's Board of Directors.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
As previously reported in a Current Report on Form 8-K, on
September 27, 1995, the Board of Directors of Lee Pharmaceuticals
authorized, effective September 27, 1995, (1) the termination of the
engagement of Meir & Meir as independent auditors for Lee
Pharmaceuticals for the fiscal year ended September 30, 1995 and (2)
the engagement of Jeffery, Corrigan & Shaw, 245 South Los Robles
Avenue, Suite 400, Pasadena, California 91101-2894, as independent
auditors for Lee Pharmaceuticals for fiscal 1995. Jeffery, Corrigan &
Shaw was engaged as the Company's principal independent auditors on
September 29, 1995.
During the fiscal year ended September 30, 1994 and through
September 27, 1995 there were no disagreements with Meir & Meir on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Meir & Meir would have caused them to
make reference in connection with their report to the subject matter.
The Company had been informed by Meir & Meir that information had come
to their attention that made them conclude that the scope of the audit
should be expanded to include an expert opinion regarding the
environmental issues the Company is involved with. The finding of
such expert may materially impact the fairness or reliability of the
previously issued audit reports or the underlying financial
statements, or the financial statements to be issued covering the
fiscal periods subsequent to the date of the most recent audited
financial statements (including information that might preclude the
issuance of an unqualified report). The request by Meir & Meir to
include the expert opinion in the fiscal 1995 audit was not the basis
for the Company's change in independent accountants.
Prior to such firm's engagement, Jeffery, Corrigan & Shaw was not
consulted by the Company (or anyone acting on its behalf) regarding
(1) either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Lee Pharmaceuticals' financial
statements or (2) any matter that was either the subject of a
"disagreement" of a "reportable event" as such terms are defined in
Regulation S-K promulgated by the Securities and Exchange Commission.
As previously reported in a Current Report on Form 8-K, on October
27, 1995, the Board of Directors of Lee Pharmaceuticals authorized,
effective October 27, 1995, (1) the termination of the engagement of
Jeffery, Corrigan & Shaw as independent auditors for Lee
Pharmaceuticals for the fiscal year ended September 30, 1995 and (2)
the engagement of George Brenner, CPA, 9300 Wilshire Boulevard, Suite
480, Beverly Hills, California 90212, as independent auditor for Lee
Pharmaceuticals for fiscal 1995. George Brenner, CPA was engaged as
the Company's principal independent auditor on October 27, 1995.
In connection with its activities for the period September 27,
1995, (the date Jeffery, Corrigan & Shaw was engaged), through October
27, 1995, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the
satisfaction of Jeffrey, Corrigan & Shaw would have caused them to
make reference in connection with their report to the subject matter.
Jeffrey, Corrigan & Shaw was unable to proceed with the audit
engagement because of its failure to obtain the insurance it believed
was necessary.
Prior to such firm's engagement, George Brenner, CPA was not
consulted by the Company (or anyone acting on its behalf) regarding
(1) either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Lee Pharmaceuticals' financial
statements or (2) any matter that was either the subject of a
"disagreement" of a "reportable event" as such terms are defined in
Regulation S-K promulgated by the Securities and Exchange Commission.
<PAGE>
24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
Directors are elected to serve until the next annual stockholders'
meeting or until their respective successors have been elected and
qualified or as otherwise provided in the bylaws. Set forth below for
the current directors and executive officers are their ages, principal
occupations during the past five years, and the period during which
they have served as a director or officer of the Company.
<TABLE>
<CAPTION>
A DIRECTOR
POSITIONS HELD OR OFFICER PRINCIPAL OCCUPATION
NAME AGE WITH COMPANY SINCE DURING THE PAST FIVE YEARS (1)
- ---- --- --------------- ----------- ------------------------------
<S> <C> <C> <C> <C>
Dr. Henry L. Lee 69 Director 1971 Chairman of the Board of Lee Pharmaceuticals through
April, 1995 when he retired, available as a consultant,
currently a Director of the Company
Ronald G. Lee 43 President, Chairman 1977 President and since April 1995 Chairman of the Board
and Director of the Company
Theo. H. Dettlaff 65 Vice President, 1979 President of Consumer Products Division and
President of Consumer Director of Company
Products Division and
Director
Michael L. Agresti 53 Vice President -- 1977 Vice President -- Finance, Treasurer and Secretary
Finance, Treasurer of the Company
and Secretary
William M. Caldwell IV 48 Director 1987 President of Union Jack Group, a merchant
banking firm
</TABLE>
(1) None of the companies named, other than the Company, is a
parent, subsidiary or other affiliate of the Company.
FAMILY RELATIONSHIPS
Ronald G. Lee is the son of Dr. Henry L. Lee.
<PAGE>
25
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to
remuneration paid by the Company to the executive officers of the
Company with total annual salary and bonus of at least $100,000 for
services in all capacities while acting as officers and directors of
the Company during the fiscal years ended September 30, 1995, 1994 and
1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ -------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- ------------------ ---- ---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dr. Henry L. Lee, 1995 119,190 475(1) -- (6)
Chairman 1994 137,932 3,028(1) 55,000(3) 231(6)
(thru April 25, 1995) 1993 249,544 9,174(1) -- 22,177(6)
Ronald G. Lee, 1995 178,595 5,734(2) 80,000(4) (7)
President, Chairman 1994 206,244 3,884(2) 55,000(4) 1,909(7)
(since April 26, 1995) 1993 225,852 5,464(2) -- 24,464(7)
& Director
Theo. H. Dettlaff, Vice 1995 167,575 51,500(5) (8)
President, President 1994 185,791 55,000(5) 2,728(8)
of Consumer Products 1993 209,480 -- 25,569(8)
Division & Director
</TABLE>
(1) Includes reimbursement of medical and dental expenses not covered
by the Company's insurance plan of $1,294 and $8,116,
respectively, in 1994 and 1993, and non-cash fringe benefits of
$475, $1,734 and $1,058, respectively, in 1995, 1994 and 1993.
(2) Includes reimbursement of medical and dental expenses not covered
by the Company's insurance plan of $5,081, $713 and $4,383,
respectively, in 1995, 1994 and 1993 and non cash fringe benefits
of $653, $3,171 and $1,081, respectively, in 1995, 1994 and 1993.
(3) The Company granted 55,000 stock options on January 24, 1994 which
had an option price of $1.44 at the date of grant.
(4) The Company granted 80,000 stock options on May 8, 1995 which had
an option price of $.50 at the date of grant and 55,000 stock
options on January 24, 1994 which had an option price of $1.31 at
the date of grant.
(5) The Company granted 51,500 stock options on May 8, 1995 which had
an option price of $.50 at the date of grant and 55,000 stock
options on January 24, 1994 which had an option price of $1.31 at
the date of grant.
(6) Amount represents the fair market value of Company shares
purchased and/or forfeitures in the Company's Employee Stock
Ownership Plan and Trust. There were no shares purchased and/or
forfeitures in the Company's Employee Stock Ownership Plan and
Trust in 1995.
(7) Amount represents the fair market value of Company shares
purchased and/or forfeitures in the Company's Employee Stock
Ownership Plan and Trust of $0 in 1995, $349 in 1994 and $22,177
in 1993 and life insurance policy with an annual premium of $0 in
1995, $1,560 in 1994 and $2,287 in 1993.
(8) Amount represents the fair market value of Company shares
purchased and/or forfeitures in the Company's Employee Stock
Ownership Plan and Trust of $0 in 1995, $311 in 1994 and $22,177
in 1993 and life insurance policy with an annual premium of $0 in
1995, $2,417 in 1994 and $3,392 in 1993.
Dr. Henry Lee's participation in the Company's Employee Stock
Ownership Plan and Trust ("Plan") terminated when he retired.
Subsequent distribution of the 66,286 shares and $9,058 cash
was made after September 30, 1995. He elected to take all cash
which was $39,380 net after mandatory (22%) withholding taxes.
Each of the directors of the Company who is not employed by the
Company receives a director's fee of $750 for each quarter and
$500 for each meeting of the Board of Directors attended.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OF BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PRICE ($/SHARE) DATE
- ---- ----------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C>
Ronald G. Lee 80,000 49 .50 5/7/2000
Theo. H. Dettlaff 51,500 20 .50 5/7/2000
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS
AT FISCAL YEAR END (#)
NAME EXERCISABLE/UNEXERCISABLE
- ---- --------------------------------
<S> <C>
Ronald G. Lee 76,333/116,667
Theo. H. Dettlaff 76,333/88,167
</TABLE>
<PAGE>
26
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company established an Employee Stock Ownership Plan and Trust
("Plan") effective December 1, 1985. The Plan is a tax-qualified
employee stock ownership plan which is designed to invest primarily in
the common stock of the Employer for the benefit of the employees and
their beneficiaries.
The benefits provided by the Plan are paid for entirely by the
Employer. The Employer contributions are used to purchase the common
stock of the Employer, which is credited to the individual accounts
maintained for each participant. In addition to providing an
opportunity for employees to participate in the Employer's growth
through stock ownership and to provide funds for employees'
retirement, the Plan is designed to be available as a technique of
corporate finance to the Employer.
All employees who had completed at least a six-month period of
service with the Employer as of the effective date of this Plan
(December 1, 1985) became participants in the Plan as of such date.
Every other employee will become a participant in the Plan as of the
first day of the month coinciding with or next following the date upon
which he completes a six-month period of service provided that he is
employed by the Employer on such date.
The Employer makes contributions only on behalf of the participants
who are employed by it on the last day of each Plan year, September
30. Contributions made on behalf of the employees will not be taxable
to them until the time benefits are actually paid to them.
Effective October 1, 1989, the Plan consists of two (2) parts: Plan
A, a stock bonus plan, and Plan B, a money purchase pension plan. The
Company's Board of Directors determines the amount to be contributed
annually to Plan A up to a maximum of fifteen percent (15%)
participant compensation for the Plan year (October 1 through
September 30). The contribution under Plan B is a non-discretionary
amount equal to ten percent (10%) of participant compensation for the
Plan year. The contribution by the Company to the Trust for any
single Plan year cannot exceed twenty-five percent (25%) of the total
compensation paid to Plan participants for the year.
Company contributions are allocated to each Participant's Company
Contribution Account in the proportion that his compensation for the
Plan year bears to the total compensation paid to all participants for
the Plan year. Forfeitures which arise under Plan A are allocated to
the accounts of the other participants at the end of the Plan year
during which the forfeitures arise due to termination of employment in
the same manner as Company contributions are allocated. Forfeitures
which arise under Plan B are used to offset the Company's required
contribution under Plan B.
The term "vested" as applied in the context of employee benefit
plans refers to that portion of a participant's accounts which has
become nonforfeitable because the participant has accrued a certain
number of period-of-service credits. If a participant reaches normal
retirement age (age 65), becomes permanently disabled, dies or retires
at age 65, his interest in his accounts becomes immediately 100%
vested, i.e. nonforfeitable.
The Plan has been amended to conform with the requirements of the
Tax Reform Act of 1986 and effective October 1, 1989, the vesting
schedule of the Plan is as follows:
PERIOD OF SERVICE VESTED PERCENTAGE
----------------- -----------------
Less than 3 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
The following tabulation shows the interest in the Plan and vesting
percentages of the officers who are named in the Cash Compensation
Table and all executive officers as a group as of September 30, 1995.
INTEREST IN THE PLAN
--------------------
SHARES OF CASH VESTED
NAME COMMON STOCK AMOUNT PERCENTAGE
---- ------------ ------ ----------
Henry L. Lee 66,286 $9,058 100%
Theo. H. Dettlaff 52,549 $11,504 100%
Ronald G. Lee 52,083 $11,172 100%
All executive officers 194,371 $36,872 100%
as a group (4 persons)
The Company's former Chairman's participation in the Plan terminated
when he retired. The distribution of his participation in the Plan
was made after September 30, 1995. He elected to take all cash which
totaled $39,380, net after mandatory (22%) withholding taxes.
<PAGE>
27
Effective July 1, 1993, the plan was amended for a second time. On
June 30, 1993 Plan B was canceled; therefore, all participants became
100% vested, in Plan B only, effective July 1, 1993. No contribution
was made to Plan A or B for the period October 1, 1993 through
September 30, 1994.
Effective September 30, 1995, Plan A was canceled. All participants
under Plan A became 100% vested on September 30, 1995 due to the
cancelation of Plan A. No contribution was made to Plan A or B for
the period October 1, 1994 through September 30, 1995. In connection
with the termination of Plan A, the Company wrote off the Employee
Stock Ownership Plan and Trust receivable as of September 30, 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the persons who, as of November 30,
1995, were known to the Company to be beneficial owner of more than
five percent of the Company's Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
--------------- ------------------- ----------------------- ----------
<S> <C> <C> <C>
Common Stock Dr. Henry L. Lee 357,468 shares (1) 9%
1444 Santa Anita Avenue
South El Monte, CA 91733
Common Stock Dimensional Fund Advisors, Inc. 229,200 shares 6%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
</TABLE>
(1) Includes 28,000 shares of the Company's common stock which Dr. Lee
holds as trustee for the benefit of certain family members. He
has the right to vote such shares but otherwise disclaims beneficial
ownership.
The following table sets forth the ownership of the Company's Common
Stock by its directors and its named executive officers and all
executive officers and directors as a group.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
--------------- ---------------- ----------------------- ----------
<S> <C> <C> <C>
Common Stock Dr. Henry L. Lee 357,468 (3) 9%
Common Stock Ronald G. Lee 138,616 (1) (2) 3%
Common Stock Theo. H. Dettlaff 128,914 (1) (2) 3%
Common Stock William M. Caldwell IV 3,866 (2) *
Common Stock All officers and directors
as a group (5 persons) 706,102 (1) (2) 17%
</TABLE>
(1) Includes shares held under the Plan.
(2) Includes shares subject to options exercisable at or within 60
days after December 31, 1995.
(3) Includes 28,000 shares of the Company's common stock which Dr. Lee
holds as trustee for the benefit of certain family members. He has the
right to vote such shares but otherwise disclaims beneficial ownership.
* Less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Dennis Holt, a Director of the Company during 1995, is an owner,
president and chief executive officer of Western International Media
Corp., a company which purchases radio and television time on behalf
of advertisers. During the fiscal year ended September 30, 1995 and
1994, the Company purchased approximately $204,000 and $61,000,
respectively, of television time from Western International Media
Corp. to advertise its products. Western International Media Corp.
realized a commission of approximately $19,000 and $3,000 from the
purchase of such time during fiscal years ended September 30, 1995 and
1994, respectively. In addition, Mr. Holt received a direct
remuneration from the Company of $2,000 and $3,000 during fiscal year
1995 and 1994, respectively, as a Director's fee. Effective October
12, 1995, Mr. Holt resigned from the Board of Directors.
The information regarding borrowings from and sale and leaseback
transactions between the Company and it's Chairman of the Board which
is contained in Item 6 and Note 7 of Notes to Financial Statements is
incorporated herein by this reference.
<PAGE>
28
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits have been or are
being filed herewith, and are numbered in accordance
with Item 601 of Regulation S-B:
The following exhibits are filed herewith:
10.17 - Promissory notes which were amended in January 1995
evidencing advances by the Registrant's officers
and directors
10.18 - Promissory notes evidencing advances made by the
Registrant's officers and directors
10.19 - Promissory notes which were amended in July 1995
evidencing advances made to the Registrant
10.20 - Royalty agreement dated August 31, 1994, between Lee
Pharmaceuticals and The Fleetwood Company, regarding
a brand acquisition.
10.21 - Royalty agreement dated October 4, 1988, between Lee
Pharmaceuticals and Roberts Proprietaries, Inc., regarding
a brand acquisition.
The following exhibits have previously been filed by the Company:
3.1 - Articles of Incorporation, as amended (1)
3.4 - By-laws, as amended December 20, 1977 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to By-laws effective November 1, 1980 (3)
10.1 - Qualified Stock Option Plan including forms of grant (4)
10.2 - 1985 Employee Incentive Stock Option Plan (5)
10.3 - Description of bonus agreements between the Registrant
and its officers (2)
10.4 - Lease dated December 1, 1990, for the premises located
at 1470 Santa Anita Avenue, South El Monte, California (6)
10.5 - Lease dated April 16, 1990, for the premises located at
1425 and 1427 Lidcombe Avenue, South El Monte, California (6)
10.6 - Lease dated April 16, 1990, for the premises located at
1434 Santa Anita Avenue, South El Monte, California (6)
10.7 - Lease dated April 16, 1990, for the premises located at
1460 Santa Anita Avenue, South El Monte, California (6)
10.8 - Lease dated April 16, 1990, for the premises located at
1457 Lidcombe, South El Monte, California (6)
10.9 - Lease dated April 16, 1990, for the premises located at
1500 Santa Anita Avenue, South El Monte, California (6)
10.10 - Lease dated April 16, 1990, for the premises located at
1516 Santa Anita Avenue, South El Monte, California (6)
10.11 - Lease dated March 1, 1991, for the premises located at
1444 Santa Anita Avenue, South El Monte, California (6)
10.12 - Lease dated March 1, 1991, for the premises located at
1445 Lidcombe Avenue, South El Monte, California (7)
10.13 - Promissory notes which were amended in September 1992
evidencing advances by the Registrant's officers and
directors (8)
10.14 - Promissory notes which were amended in September 1994
evidencing advances by the Registrant's officers and
directors (9)
10.15 - Promissory notes evidencing advances made to the
Registrant's officers and directors (9)
10.16 - Promissory notes evidencing advances made to the
Registrant (9)
<PAGE>
29
(1) Filed as an Exhibit of the same number with the
Company's Form S-1 Registration Statement filed with the
Securities and Exchange Commission on February 5, 1973
(Registrant No. 2-47005), and incorporated herein by
reference.
(2) Filed as Exhibits 3.4, 3.5 and 13.18 with the
Company's Form 10-K Annual Report for the fiscal year
ended September 30, 1978, filed with the Securities and
Exchange Commission in December 1978 and incorporated
herein by reference.
(3) Filed as an Exhibit of the same number with the
Company's Form 10-K Annual Report for the fiscal year
ended September 30, 1979, filed with the Securities and
Exchange Commission in December 1979 and incorporated
herein by reference.
(4) Filed as Exhibit 5.1 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30,
1973, filed with the Securities and Exchange Commission in
December 1973 and incorporated herein by reference.
(5) Filed as Exhibits 13.27 and 13.28 with the Company's
Form 10-K Annual Report for the fiscal year ended
September 30, 1986, filed with the Securities and Exchange
Commission in December 1986 and incorporated herein by
reference.
(6) Filed as Exhibit 13.31 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30,
1990, filed with the Securities and Exchange Commission in
December 1990 and incorporated herein by reference.
(7) Filed as Exhibit 13.32 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30,
1991, filed with the Securities and Exchange Commission in
December 1991 and incorporated herein by reference.
(8) Filed as Exhibit 13.33 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30,
1992, filed with the Securities and Exchange Commission in
December 1992 and incorporated herein by reference.
(9) Filed as Exhibit 13.34 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30,
1994, filed with the Securities and Exchange Commission in
December 1994 and incorporated herein by reference.
(b) Reports on Form 8-K:
A current report on From 8-K dated September 27, 1995
reporting Item 4 (Changes in Registrant's Certifying
Accountant) was filed on October 3, 1995.
A current report on Form 8-K dated October 27, 1995 reporting
Item 4 (Changes in Registrant's Certifying Accountant) was
filed on November 2, 1995.
<PAGE>
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LEE PHARMACEUTICALS
Date: January 12, 1996 RONALD G. LEE
---------------- -----------------------
Ronald G. Lee
Chairman of the Board
In accordance with the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: January 12, 1996 RONALD G. LEE
---------------- -----------------------
Ronald G. Lee
Chairman of the Board
(Principal Executive Officer) and Director
Date: January 12, 1996 HENRY L. LEE, JR.
---------------- -----------------------
Henry L. Lee, Jr.
Director
Date: January 12, 1996 THEO. H. DETTLAFF
---------------- -----------------------
Theo. H. Dettlaff
Director
Date: January 12, 1996 WILLIAM M. CALDWELL IV
---------------- -----------------------
William M. Caldwell IV
Director
Date: January 12, 1996 MICHAEL L. AGRESTI
---------------- -----------------------
Michael L. Agresti
Vice President -- Finance
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT 10.17
Note 1
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on March 15, 1990, Lee Pharmaceuticals ("Maker") and Henry L. Lee,
Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals
was to pay to Henry Lee the sum of One Hundred Ninety Three Thousand Dollars;
and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from November 15, 1999,
until January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
-----------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
-----------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 2
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on March 15, 1993, Lee Pharmaceuticals ("Maker") and Henry L. Lee,
Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals
was to pay to Henry Lee the sum of Three Hundred Seventy One Thousand Three
Hundred Thirty Four Dollars; and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from March 15, 1993, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
-----------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
-----------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 3
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on December 2, 1993, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars;
and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from February 14, 1997,
until January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
-----------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
-----------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 4
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of Fifty Thousand Dollars; and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from January 26, 1997, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
---------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
---------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 5
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars;
and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from January 28, 1997, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
-----------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
-----------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 6
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars;
and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from January 28, 1997, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 7
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on September 29, 1994, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Fifty Thousand
Dollars; and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from January 28, 1998, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
--------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
--------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 8
MODIFICATION TO PROMISSORY NOTE
WHEREAS, on December 23, 1994, Lee Pharmaceuticals ("Maker") and Henry L.
Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee
Pharmaceuticals was to pay to Henry Lee the sum of Two Hundred Fifty Thousand
Dollars; and
WHEREAS, the parties thereto desire to modify said note,
NOW, THEREFORE, the parties modify said note as follows:
1. The maturity date of the note is extended from June 30, 1998, until
January 1, 2005.
2. This note may be extended for an additional five years beyond the
maturity date at the option of Lee Pharmaceuticals.
3. All other terms and conditions of the note remain the same.
RONALD G. LEE
-------------------------------
Lee Pharmaceuticals
By: Ronald G. Lee, President
HENRY L. LEE, JR.
-------------------------------
Henry L. Lee, Jr.
<PAGE>
EXHIBIT 10.17
Note 9
STRAIGHT NOTE
$250,000.00 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Lee Foundation
or order, at South El Monte, California the sum of TWO HUNDRED AND FIFTY
THOUSAND DOLLARS, with interest from February 12, 1992 on unpaid principal at
the rate of Imperial Bank Prime Rate per cent per annum; principal payable on
January 1, 2005. Interest shall be calculated on the basis of the unpaid
principal balance daily, based on a 365 day year, actual day month, payable
monthly. Principal and interest shall be payable in lawful money of the
United States. If action be instituted on this note, I promise to pay such
sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option
this note could be extended for an additional five years beyond the above
maturity date. This note is secured by the product brand. This note
replaces another note dated February 12, 1992, which is the reason interest
runs from February 12, 1992.
January 3, 1995 RONALD G. LEE
- -------------------------- -----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- -------------------------- -----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 10
STRAIGHT NOTE
$150,000.00 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Lee Foundation
or order, at South El Monte, California the sum of ONE HUNDRED AND FIFTY
THOUSAND DOLLARS, with interest from February 12, 1992, on unpaid principal
at the rate of Imperial Bank Prime Rate per cent per annum; principle payable
on January 1, 2005. Interest shall be calculated on the basis of the unpaid
principal balance daily, based on a 365 day year, actual day month, payable
monthly. Principal and interest shall be payable in lawful money of the
United States. If action be instituted on this note, I promise to pay such
sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option
this note could be extended for an additional five years beyond the above
maturity date. This note is secured by the product brand. This note
replaces another note dated February 12, 1992, which is the reason interest
runs from February 12, 1992.
January 3, 1995 RONALD G. LEE
- ------------------------ ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------ ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 11
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
- ---------------
For value received, Lee Pharmaceuticals promises to pay Cassandra
Karazissis or order, at South El Monte, California the sum of TEN THOUSAND
DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of
Imperial Bank Prime Rate per cent per annum; principal payable on January 1,
2005. Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal and
interest shall be payable in lawful money of the United States. If action be
instituted on this note, I promise to pay such sum as the Court may fix as
attorney's fees. At Lee Pharmaceuticals option this note could be extended for
an additional five years beyond the above maturity date. This note is secured
by the product brand. This note replaces another note dated December 26, 1991,
which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 12
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
- ----------------
For value received, Lee Pharmaceuticals promises to pay Diana Lee
Karazissis or order, at South El Monte, California the sum of TEN THOUSAND
DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of
Imperial Bank Prime Rate per cent per annum; principal payable on January 1,
2005. Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal and
interest shall be payable in lawful money of the United States. If action be
instituted on this note, I promise to pay such sum as the Court may fix as
attorney's fees. At Lee Pharmaceuticals option this note could be extended for
an additional five years beyond the above maturity date. This note is secured
by the product brand. This note replaces another note dated December 26, 1991,
which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 13
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
- --------------------
For value received, Lee Pharmaceuticals promises to pay Kristopher
Karazissis or order, at South El Monte, California the sum of TEN THOUSAND
DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of
Imperial Bank Prime Rate per cent per annum; principal payable on January 1,
2005. Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal and
interest shall be payable in lawful money of the United States. If action be
instituted on this note, I promise to pay such sum as the Court may fix as
attorney's fees. At Lee Pharmaceuticals option this note could be extended for
an additional five years beyond the above maturity date. This note is secured
by the product brand. This note replaces another note dated December 26, 1991,
which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 14
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
- ---------------
For value received, Lee Pharmaceuticals promises to pay Nick Karazissis or
order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with
interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank
Prime Rate per cent per annum; principal payable on January 1, 2005. Interest
shall be calculated on the basis of the unpaid principal balance daily, based on
a 365 day year, actual day month, payable monthly. Principal and interest shall
be payable in lawful money of the United States. If action be instituted on
this note, I promise to pay such sum as the Court may fix as attorney's fees.
At Lee Pharmaceuticals option this note could be extended for an additional five
years beyond the above maturity date. This note is secured by the product
brand. This note replaces another note dated December 26, 1991, which is the
reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 15
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Nickie
Karazissis or order, at South El Monte, California the sum of TEN THOUSAND
DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate
of Imperial Bank Prime Rate per cent per annum; principal payable on January
1, 2005. Interest shall be calculated on the basis of the unpaid principal
balance daily, based on a 365 day year, actual day month, payable monthly.
Principal and interest shall be payable in lawful money of the United States.
If action be instituted on this note, I promise to pay such sum as the Court
may fix as attorney's fees. At Lee Pharmaceuticals option this note could be
extended for an additional five years beyond the above maturity date. This
note is secured by the product brand. This note replaces another note dated
December 26, 1991, which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- --------------------- ------------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- --------------------- ------------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 16
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Megan Amy Lee
or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with
interest from January 1, 1992, on unpaid principal at the rate of Imperial
Bank Prime Rate per cent per annum; principal payable on January 1, 2005.
Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal
and interest shall be payable in lawful money of the United States. If
action be instituted on this note, I promise to pay such sum as the Court may
fix as attorney's fees. At Lee Pharmaceuticals option this note could be
extended for an additional five years beyond the above maturity date. This
note is secured by the product brand. This note replaces another note dated
December 26, 1991, which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- --------------------- ------------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- --------------------- ------------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 17
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Henry L. Lee IV
or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with
interest from January 1, 1992, on unpaid principal at the rate of Imperial
Bank Prime Rate per cent per annum; principal payable on January 1, 2005.
Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal
and interest shall be payable in lawful money of the United States. If
action be instituted on this note, I promise to pay such sum as the Court may
fix as attorney's fees. At Lee Pharmaceuticals option this note could be
extended for an additional five years beyond the above maturity date. This
note is secured by the product brand. This note replaces another note dated
December 26, 1991, which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ----------------------- ------------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ----------------------- ------------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 18
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Debbie Lee or
order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with
interest from January 1, 1992, on unpaid principal at the rate of Imperial
Bank Prime Rate per cent per annum; principal payable on January 1, 2005.
Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal
and interest shall be payable in lawful money of the United States. If
action be instituted on this note, I promise to pay such sum as the Court may
fix as attorney's fees. At Lee Pharmaceuticals option this note could be
extended for an additional five years beyond the above maturity date. This
note is secured by the product brand. This note replaces another note dated
December 26, 1991, which is the reason interest runs from January 1, 1992.
January 3, 1995 RONALD G. LEE
- ---------------------------- ---------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ---------------------------- ---------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.17
Note 19
STRAIGHT NOTE
$10,000 South El Monte, California January 1, 1995
For value received, Lee Pharmaceuticals promises to pay Ronald G. Lee
or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with
interest from November 22, 1993, on unpaid principal at the rate of Imperial
Bank Prime Rate per cent per annum; principal payable on January 1, 2005.
Interest shall be calculated on the basis of the unpaid principal balance
daily, based on a 365 day year, actual day month, payable monthly. Principal
and interest shall be payable in lawful money of the United States. If
action be instituted on this note, I promise to pay such sum as the Court may
fix as attorney's fees. At Lee Pharmaceuticals option this note could be
extended for an additional five years beyond the above maturity date. This
note is secured by the product brand. This note replaces another note dated
November 22, 1993, which is the reason interest runs from November 22, 1993.
January 3, 1995 RONALD G. LEE
- ------------------------- -----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
January 3, 1995 MICHAEL L. AGRESTI
- ------------------------- -----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.18
Note 1
STRAIGHT NOTE
$250,000 South El Monte, California December 23, 1994
- --------
For value received, Lee Pharmaceuticals promises to pay Henry L. Lee, Jr.
or order, at South El Monte, California the sum of TWO HUNDRED AND FIFTY
THOUSAND DOLLARS, with interest from December 23, 1994, on unpaid principal at
the rate of Imperial Bank Prime Rate per cent per annum; principal payable on
June 30, 1998. Interest shall be calculated on the basis of the unpaid
principal balance daily, based on a 365 day year, actual day month, payable
monthly. Principal and interest shall be payable in lawful money of the United
States. If action be instituted on this note, I promise to pay such sum as the
Court may fix as attorney's fees. This note is unsecured.
December 27, 1994 RONALD G. LEE
- ------------------- -------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
December 27, 1994 MICHAEL L. AGRESTI
- --------------------- ---------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.18
Note 2
STRAIGHT NOTE
$38,000 South El Monte, California April 12, 1995
- -------------
For value received, Lee Pharmaceuticals promises to pay Ronald G. Lee or order,
at South El Monte, California the sum of THIRTY-EIGHT THOUSAND DOLLARS, with
interest from February 17, 1995 on unpaid principal at the rate of Imperial Bank
Prime Rate per cent per annum; principal payable on March 21, 1997. Interest
shall be calculated on the basis of the unpaid principal balance daily, based on
a 365 day year, actual day month, payable semi-annually (August 17 and February
17). Principal and interest shall be payable in lawful money of the United
States. If action be 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 product brand
Aloe E and Aloe 99.
February 17, 1995 RONALD G. LEE
- ------------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
February 17, 1995 MICHAEL L. AGRESTI
- ------------------------------ ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.19
Note 1
STRAIGHT NOTE
$50,000 South El Monte, California July 3, 1995
- --------------
For value received, Lee Pharmaceuticals promises to pay Mark Di Salvo or
order, at South El Monte, California the sum of FIFTY THOUSAND DOLLARS, with
interest from July 7, 1995 on unpaid principal at the rate of fifteen (15) per
cent per annum; principal payable on July 6, 1996. Interest shall be calculated
on the basis of the unpaid principal balance daily, based on a 365 day year,
actual day month, payable monthly. Principal and interest shall be payable in
lawful money of the United States. If action be 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 product brand WATE-ON.
NOTE: This note is a rollover of the note which was dated September 12, 1994,
and maturing on July 6, 1995.
July 28, 1995 RONALD G. LEE
- ---------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
July 28, 1995 MICHAEL L. AGRESTI
- ---------------------------- ----------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.19
Note 2
STRAIGHT NOTE
$50,000 South El Monte, California July 3, 1995
- ------------------
For value received, Lee Pharmaceuticals promises to pay Sass Di Salvo or
order, at South El Monte, California the sum of FIFTY THOUSAND DOLLARS, with
interest from July 7, 1995 on unpaid principal at the rate of fifteen (15) per
cent per annum; principal payable on July 6, 1996. Interest shall be calculated
on the basis of the unpaid principal balance daily, based on a 365 day year,
actual day month, payable monthly. Principal and interest shall be payable in
lawful money of the United States. If action be 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 product brand WATE-ON.
NOTE: This note is a rollover of the note which was dated September 12, 1994,
and maturing on July 6, 1995.
July 28, 1995 RONALD G. LEE
- --------------------------- -------------------------------------------
Date Lee Pharmaceuticals - Ronald G. Lee
July 28, 1995 MICHAEL L. AGRESTI
- ---------------------------- -------------------------------------------
Date Lee Pharmaceuticals - Michael L. Agresti
<PAGE>
EXHIBIT 10.20
Page 1
ROYALTY AGREEMENT
------------------
THIS AGREEMENT is made as of this 31st day of August, 1994, by and
between LEE PHARMACEUTICALS, INC., a California corporation ("Lee") and THE
FLEETWOOD COMPANY, a Delaware corporation ("Fleetwood").
RECITALS
WHEREAS, Lee has acquired certain Assets, including the Products from
Fleetwood pursuant to an Asset Purchase and Sale Agreement between Lee and
Fleetwood, dated August 31, 1994 (the "Purchase Agreement");
NOW, THEREFORE, it is agreed by and between the parties hereto as
follows:
1. DEFINITIONS.
(a) "Products" means those Products set forth in Purchase
Agreement.
(b) "Net Sale Price" means the gross sales price paid by any
independent purchaser of the Products less any discount, allowances or returns
and taxes.
(c) "Fiscal Period" shall mean the five (5) fiscal years
commencing on September 1, 1994 and ending on August 31, 1999.
(d) "Fiscal Year" shall mean each fiscal year during the Fiscal
Period with the first Fiscal Year beginning on the first day in the Fiscal
Period.
(e) "Royalty Period" shall be each fiscal quarter during the
Fiscal Period with the first Royalty Period beginning on the first day in the
Fiscal Period.
(f) "Territory" shall mean the United States, its territories
and possessions including Puerto Rico and the U.S. Virgin Islands.
(g) Other terms not defined herein shall have the meaning set
forth in the Purchase Agreement.
2. ROYALTIES.
(a) ROYALTY RATE. Lee shall pay royalties to Fleetwood for all
Products sold or otherwise disposed of subsequent to the date of this Agreement
by Lee in the Territory during the Fiscal Period, at the rate equal to twelve
percent (12%) of the Net Sales Price of each Product so sold during the Fiscal
Period in the Territory (the "Royalties") ; provided, however, Lee shall pay a
"Minimum Royalty" for the first three Fiscal Years as set forth in Section 2(b)
hereof. To the extent that the aggregate amount of Royalties actually earned
for any of such Royalty Period, or any prior Royalty Period, exceeds the Minimum
Royalty due for such respective Royalty Period, such excess amounts which have
not been previously used to credit towards a Minimum Royalty for a Royalty
Period, shall be applied against the Minimum Royalty due in any subsequent
Royalty Period.
-1-
<PAGE>
EXHIBIT 10.20
PAGE 2
(b) MINIMUM AND MAXIMUM ROYALTIES. Notwithstanding Section 2(a)
hereof, Lee shall pay Fleetwood Minimum Royalties in an amount equal to Two
Hundred Forty-Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725),
payable in thirty-six (36) monthly installments, at the rate of Six Thousand
Eight Hundred Eighty-One Dollars and Twenty-Five Cents ($6,881.25) beginning on
September 30, 1994 and continuing on the last day of each month for the next
thirty-five (35) months. In no case shall the Royalties payable under Section
2(a) hereof and this Section 2(b) exceed in the aggregate Two Hundred Forty-
Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725).
(c) ROYALTY PAYMENT. The aggregate amount of Royalties accruing
during each Royalty Period pursuant to Section 2(a) hereof is hereinafter
referred to as the "Royalty Payment." The Royalty Payment shall be made by Lee
to The Fleetwood Company, 1500 Brook Drive, Downers Grove, Illinois 60515-1093
(at such place as Fleetwood shall notify Lee in writing) within thirty (30) days
of the end of each Royalty Period included within the Fiscal Period in which a
sale or other disposition of a Product takes place in the Territory for such
Royalty Period, at which time there shall be delivered to Fleetwood an
accounting of the operations upon which such Royalty Payment is based, certified
by an officer of Lee, which accounting and certification shall be in form and
substance reasonably satisfactory to Fleetwood.
(d) ROYALTY TERM. Unless otherwise terminated sooner, this
Agreement and all obligations of Lee to pay Royalties on sales of the Product in
the Territory shall terminate on August 31, 1999 (except payments due up to and
including, but not paid by August 31, 1999) or when an aggregate of Two Hundred
Forty-Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725) of total
royalty payment has been made.
3. FUTURE PATENTS. All inventions registered with the United States
or any foreign patent office and any and all rights thereunder, both domestic
and international, relating to the Products or the method of manufacturing,
using or selling the Products that may be obtained, discovered or made by Lee
during the term of this Agreement shall be the property of Lee and Fleetwood
shall have no rights therein, except the rights to the Royalties.
4. PROTECTION OF CONFIDENTIAL INFORMATION. Lee and Fleetwood shall
each take all steps which are necessary or reasonable to safeguard the secrecy
and confidentiality of information related to the Products.
5. RIGHTS. After this Agreement terminates, Lee shall have the
right to manufacture and sell anywhere in the world, the Products without
payment of any further royalties.
6. GOVERNING LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of California.
7. ENTIRE AGREEMENT. This Agreement and the Purchase Agreement
contain the entire agreement of the parties with respect to the subject matter
hereof. This Agreement may not be changed orally, but only by written agreement
of both parties hereto.
-2-
<PAGE>
EXHIBIT 10.20
PAGE 3
8. SEVERABILITY. In the event that any provision of this Agreement
is adjudicated invalid, illegal or unenforceable, such adjudication will not
affect the validity, legality or enforceability of any other provision, and this
Agreement will be construed as though such invalid, illegal or unenforceable
provisions had never been contained herein.
9. RELATIONSHIP OF PARTIES. Nothing in this Agreement will be
deemed to create a relationship of employment or agency or to constitute the
parties as partners or joint venturers.
10. CAPTIONS. The underlined captions are included herein for
convenience and do not constitute a part of this Agreement.
11. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
12. EXPENSES OF PROCEEDINGS. In the event that any party hereto
brings any type of proceeding to enforce the terms and conditions of this
Agreement, the prevailing party in such proceeding shall be entitled to recover
from the unsuccessful party all incidental costs and reasonable attorneys' and
paralegal's fees incurred by said prevailing party.
13. NOTICES. Notices will be deemed given when received if sent by
telecopy, hand delivery, or mailed, first class and postage prepaid to the
following address or to such other address as either party may notify the other
in writing:
If to Lee:
LEE PHARMACEUTICALS, INC.
1434 Santa Anita Avenue
South El Monte, CA 91733-3312
Attention: Ronald G. Lee, President
With a copy to:
Ronald P. Givner, Esq.
Jeffer, Mangels, Butler & Marmaro
2121 Avenue of the Stars
Tenth Floor
Los Angeles, CA 90067
If to Fleetwood:
THE FLEETWOOD COMPANY
1500 Brook Drive
Downers Grove, IL 60515-1093
Attention: Nelson McMahon, President
With a copy to:
James S. Jarvis, Esq.
Aronberg Goldgehn Davis & Garmisa
One Chicago Plaza, Suite 3000
Chicago, IL 60611-3633
-3-
<PAGE>
EXHIBIT 10.20
PAGE 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
LEE PHARMACEUTICALS, INC.
By: RONALD G. LEE
------------------------------
Ronald G. Lee, President
THE FLEETWOOD COMPANY
By: NELSON MC MAHON
------------------------------
Nelson McMahon, President
-4-
<PAGE>
EXHIBIT 10.21
Page 1
ROYALTY AGREEMENT
-----------------
THIS AGREEMENT is made this 4th day of October,
1988, by and between LEE PHARMACEUTICALS, INC., a California
corporation ("Lee") and ROBERTS PROPRIETARIES, INC., a New
York corporation ("Roberts").
RECITALS
WHEREAS, Lee has acquired certain Assets, including
the Products from Roberts pursuant to a Purchase and Sale
Agreement between Lee, Roberts and Keith Roberts, dated
September 30, 1988 (the "Purchase Agreement"); and
WHEREAS, in connection with the acquisition of such
Assets, Lee is to pay to Roberts the Royalties provided for
herein.
NOW, THEREFORE, it is agreed by and between the
parties hereto as follows:
1. DEFINITIONS.
(a) "Products" means those depilatory drug
products listed on Schedule A hereto and any developments,
innovations or improvements made thereon marketed under the
tradename or trademark "Zip" or "Zip Wax." The Products
shall include all hot wax and cold wax depilatory drug
producs. The Products shall not include any depilatory drug
products currently being sold under the "Bikini Bare"
trademark or any other non-hot wax or non -cold wax
depilatory drug products which Lee acquires or develops after
the date hereof unless subsequently sold under the "Zip" or
"Zip Wax" tradename or trademark.
(b) "Net Sale Price" means the actual price
received from the domestic or international sale of the
Products (less the actual sale prices of any Products
returned), exclusive of freight, handling, insurance, custom
duties and any sales, use or value added or similar taxes
levied on the sale of the Products. "Net Sales" shall not
include (i) receipts through salon operations by Lee, its
Subsidiaries or its licensees for treatment of the Products
directly through or in connection with a salon or salons
owned or operated by Lee, such Subsidiaries or such licensees
and (ii) sales by Lee to its Subsidiaries or licensees or its
Subsidiaries to licensees for resale, but in such instances
the obligations to pay Royalties shall arise upon the sale by
Lee's Subsidiaries or licensees to third parties.
(c) "Lee" shall mean Lee Pharmaceuticals,
Inc., its permitted successors and assigns and any
Subsidiaries thereof.
(d) "Minimum Royalty" shall mean the payments
of Royalties for each Fiscal Period hereof equal to Five
Hundred Thousand Dollars ($500,000).
-1-
<PAGE>
EXHIBIT 10.21
Page 2
(e) "Fiscal Period" shall mean (i) the period
from the Closing of the Agreement to September 30, 1989, and
(ii) a fiscal year beginning October 1 each year (commencing
with October 1, 1989) until the termination of the Royalty
Period.
(f) "Maximum Royalty" shall mean Five Million
Dollars ($5,000,000).
(g) "Royalty Period" shall mean the ten (10)
Fiscal Periods beginning on the Closing and ending on
September 30, 1998.
(h) "Subsidiary" shall mean a company in
which at least fifty percent (50%) of the voting stock of
which at the time of reference is legally, equally or
factually owned, directly or indirectly, by Lee or an entity
controlling, controlled by or under common control with Lee.
(i) Other terms not defined herein shall have
the meaning set forth in the Purchase Agreement.
2. ROYALTIES.
(a) ROYALTY RATE. Lee shall pay royalties to
Roberts for all Products sold or otherwise disposed of
subsequent to the date of this Agreement by Lee, its
Subsidiaries and its licensees at the rate equal to ten
percent (10%) of the Net Sales Price of each Product sold
during the Royalty Period ("Royalty" or "Royalties").
(b) QUARTERLY ROYALTY PAYMENT. The aggregate
amount of Royalties accruing during each fiscal quarter of
each Fiscal Period pursuant to Section 2(a) hereof is
hereinafter referred to as the "Quarterly Royalty Payment."
The Quarterly Royalty Payment shall be made by Lee to Roberts
within forty-five (45) days of the end of each such fiscal
quarter in which a sale or other disposition of a Product
takes place, at which time there shall be delivered to
Roberts an accounting of the operations upon which such
Quarterly Royalty Payment is based, certified by an officer
of Lee, which accounting and certification shall be in form
and substance reasonably satisfactory to Roberts. The first
such accounting shall include all Products sold or otherwise
disposed of pursuant to this Agreement between the Closing
and the date of such accounting. The aggregate of Quarterly
Royalty Payments is hereinafter referred to as "Royalty
Payment."
(c) MINIMUM ROYALTY. If the total amount of
earned Royalty Payments for a Fiscal Period pursuant to
Section 2(a) hereof is less than the Minimum Royalty, then
with the payment for the fourth fiscal quarter of such Fiscal
Period, Lee shall pay to Roberts an additional amount (the
"Additional Amounts") so that Roberts receives for such
Fiscal Period the Minimum Royalty. Any Royalty Payments due
for a Fiscal Period in excess of the Minimum Royalty shall be
reduced by any Additional Amounts for any prior Fiscal Period
that has not been previously offset until all such Additional
Amounts have been so offset and then shall be credited
against any Additional Amounts due in subsequent Fiscal
Periods.
-2-
<PAGE>
EXHIBIT 10.21
Page 3
(d) MAXIMUM ROYALTY. Notwithstanding any
other provisions of this Agreement, in no case shall the
aggregate of all Royalty Payments (including any Additional
Amounts paid pursuant to the Minimum Royalties) exceed the
Maximum Royalty. Upon payment of the Maximum Royalty, this
Agreement and all obligations of Lee to pay further Royalties
shall terminate.
(e) ROYALTY PERIOD. Unless otherwise
terminated sooner, this Agreement and all obligations of Lee
to pay Royalties shall terminate on the last day of the
Royalty Period.
(f) LATE PAYMENT. Any Royalty Payment
(including any Additional Amounts) or part thereof which is
not made on or before the date when due shall accrue interest
thereon from and after such date and until the date of
payment at the rate of one percent (1%) above the published
prime rate of Bank of America NT&SA, from time to time in
effect, compounded quarterly, but in no event shall such rate
exceed the rate permitted by applicable law.
3. FUTURE PATENTS. All inventions registered
with the United States or any foreign patent office and any
and all rights thereunder, both domestic and international,
relating to the Products or the method of manufacturing,
using or selling the Products that may be obtained,
discovered or made by Lee during the term of this Agreement
shall be the property of Lee and Roberts shall have no rights
therein, except the rights to the Royalties provided for in
Section 2 hereof relating to the Products.
4. DUTY TO EXPLOIT. Lee shall use its best
efforts to market, manufacture and otherwise commercially
exploit the Products. Lee will take no action the effect of
which is to reduce the amount of the Royalties payable under
Section 2 hereof.
5. PROTECTION OF CONFIDENTIAL INFORMATION. Lee
and Roberts shall each take all steps which are necessary or
reasonable to safeguard the secrecy and confidentiality of
information related to the Products.
6. TERM AND TERMINATION. Accrual of Royalties
under this Royalty Agreement shall continue in effect from
the date of this Agreement until the later to occur of: (i)
payment of the Maximum Royalty or (ii) the last day of the
Royalty Period. Thereafter, Lee shall have the right to
manufacture and sell anywhere in the world the Products
without payment of any further Royalties and the provisions
hereof concerning reports, records and disclosure shall no
longer apply. Royalties accrued as of the date of the
termination of this Agreement shall remain due and payable
notwithstanding termination of this Agreement.
7. SECURITY. Payment of the Royalties is secured
by a Security Agreement attached to the Purchase Agreement
hereto as Exhibit "D."
-3-
<PAGE>
EXHIBIT 10.21
Page 4
8. ASSIGNMENT.
(a) In the event that Lee shall sell, assign
or transfer the business relating to all or any of the
Products or to the trademarks or tradenames "Zip" or "Zip
Wax", Lee shall, within five (5) days after such sale,
assignment or transfer, send a written notice thereof to
Roberts, stating the date thereof, a description of that
which was sold, assigned or transferred, and the name and
post office address of the purchaser, assignee or transferee,
and shall, as a condition to such sale, assignment or
transfer, obtain an undertaking of the purchaser, assignee or
transferee to continue to pay the Royalties specified herein
in Section 2 hereof, with respect to such Product or
Products, to Roberts in accordance with the terms hereof and
upon obtaining such undertaking, Lee shall be released of its
obligations hereunder with respect to such Product(s) which
were sold, assigned or transferred.
(b) In the event all or any part of the
rights to receive Royalties payable hereunder are sold,
assigned or transferred by Roberts or its successors or
assigns, payment of the Royalties relating to the Royalties
so sold, assigned or transferred shall thereafter be made to
such purchaser, assignee or transferee, provided that the
party making such sale, assignment or transfer shall have
given due written notice to Lee of such sale, assignment or
transfer, stating in such notice the proportion of the
Royalty and the name and address of the person to whom such
sale, assignment or transfer is made. Thereafter, all
payment of the Royalties pursuant to Section 2 above, and all
reports required by Section 2(b) above, shall be made to such
purchaser, assignee or transferee. In the event any such
purchaser, assignee or transferee shall desire to exercise
the rights of Roberts under Section 9 hereof, Lee shall not
be required to comply with such request except at the request
of a person having a right to receive not less than twenty-
five percent (25%) of the Royalties payable hereunder.
9. RECORDS. Lee shall keep complete and accurate
records of all sales of the Products for at least three (3)
years after the date of each report of such sales, which
records shall be open during reasonable business hours at
Lee's place of business to a certified public accountant
selected by Roberts and reasonably acceptable to Lee who
shall, at Roberts' expense, have access to such records for
the sole purpose of verifying for Roberts, not more often
than once each year (except in the event a claim is filed),
the sales and payments accrued as herein provided. Such
accountant shall treat as confidential and shall not disclose
to Roberts any information other than information relating
solely to the sales payments accrued and the accuracy of the
reports and payments required to be made under this Agreement
and, in no event, are the quantities or prices to the
individual customers to be disclosed to Roberts by said
accountant, provided, however, that in the event any claim by
Roberts be asserted during the three (3) year period, then
Lee shall preserve all relevant records until the resolution
of the claim.
-4-
<PAGE>
EXHIBIT 10.21
Page 5
10. CURRENCIES. The payments provided for in
Section 2 hereof, to be made by Lee to Roberts, shall accrue
and be payable in the currency of the country where the sale
is made or the currency in which the payment is received by
Lee, a Subsidiary or a licensee. In the case of sales made
or payments received outside the United States of America,
Lee will, for the convenience and account of Roberts, make
diligent efforts, subject to pertinent laws and regulations,
to secure the transfer and conversion of the payments due
hereunder into the equivalent of United States dollars at the
applicable rate of exchange at the date of payment and the
remittance thereof to Roberts in United States dollars in the
United States, less all necessary related taxes, assessments,
charges and expenses incurred or required by any local
government in order to convert said foreign currency into
United States dollars. In the event such transfer or
conversion is not lawful or practicable, the payment shall be
made by deposit thereof in the national currency of the
country where said sales are made or payment or royalties
received, to the credit and account of Roberts or their
nominee in any commercial bank or trust company of Roberts'
choice in said country and prompt written notice of each
deposit shall be given to Roberts.
11. OFFSET. Payments of Royalties hereunder may
be reduced by amounts due Lee pursuant to Section 20 of the
Purchase agreement. Amount to be so offset against further
Royalties shall bear simple interest equal to the reference
(prime rate) charged by the Bank of America NT&SA from time
to time (but in no case shall the interest rate at any time
exceed maximum rate permitted by law) until the Royalty being
offset is otherwise due and payable.
12. GOVERNING LAW. This Agreement will be
governed by and construed in accordance with the laws of the
State of California.
13. ENTIRE AGREEMENT. This Agreement, the
Security Agreement and the Purchase Agreement contain the
entire agreement of the parties with respect to the subject
matter hereof. This Agreement may not be changed orally, but
only by written agreement of both parties hereto.
14. SEVERABILITY. In the event that any provision
of this Agreement is adjudicated invalid, illegal or
unenforceable, such adjudication will not affect the
validity, legality or enforceability of any other provision,
and this Agreement will be construed as though such invalid,
illegal or unenforceable provision had never been contained
herein.
15. RELATIONSHIP OF PARTIES. Nothing in this
Agreement will be deemed to create a relationship of
employment or agency or to constitute the parties as partners
or joint venturers.
16. CAPTIONS. The underlined captions are
included herein for convenience and do not constitute a part
of this Agreement.
17. EXECUTION IN COUNTERPARTS. This Agreement may
be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together
constitute but one and the same instrument.
-5-
<PAGE>
EXHIBIT 10.21
Page 6
18. NOTICES. Notices will be deemed given when
received if sent by telecopy, hand delivery, or mailed, first
class and postage prepaid to the following address or to such
other address as either party may notify the other in
writing:
If to Lee:
LEE PHARMACEUTICALS, INC.
1434 Santa Anita Avenue
South El Monte, California 91733
Attention: Ronald G. Lee, President
If to Roberts:
ROBERTS PROPRIETARIES INC.
201 Route 17 North
Rutherford, New Jersey 07070
Attn: Keith Roberts, President
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date first written above.
LEE PHARMACEUTICALS, INC.
By: RONALD G. LEE
------------------------
Ronald G. Lee, President
ROBERTS PROPRIETARIES, INC.
By: KEITH ROBERTS
------------------------
Keith Roberts, President
-6-
<PAGE>
EXHIBIT 10.21
Page 7
SCHEDULE "A"
THE PRODUCTS
Products include:
(1) Zip Wax Hair Remover
(2) Zip Wax Tube For Face
(3) Zip Wax Tube For Body
(4) Zip Creme Bleach
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 1715
<ALLOWANCES> 384
<INVENTORY> 2460
<CURRENT-ASSETS> 5001
<PP&E> 7106
<DEPRECIATION> 6519
<TOTAL-ASSETS> 8715
<CURRENT-LIABILITIES> 3741
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> (583)
<TOTAL-LIABILITY-AND-EQUITY> 8715
<SALES> 9139
<TOTAL-REVENUES> 10053
<CGS> 4762
<TOTAL-COSTS> 10135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363
<INCOME-PRETAX> (1282)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1282)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
