<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7335
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LEE PHARMACEUTICALS
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-2680312
- ------------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 Santa Anita Avenue, South El Monte, California 91733
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(626) 442-3141
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
----- -----
As of June 30, 1998, there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Cash $ 9
Accounts and notes receivable (net of allowances: $171) 738
Due from related party 243
Inventories:
Raw materials $ 1,620
Work in process 273
Finished goods 235
--------
Total inventories 2,128
Other current assets 652
-------
Total current assets 3,770
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,158) 485
Goodwill and other assets (net of
accumulated amortization: $5,571) 2,187
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TOTAL $ 6,442
-------
-------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
LIABILITIES
Bank overdraft $ 144
Note payable to bank 8
Notes payable, other 933
Current portion - royalty agreements 269
Current portion - note payable related party 345
Accounts payable 1,008
Accrued liabilities - environmental cleanup 288
Other accrued liabilities 576
Due to related parties 480
Deferred income 65
--------
Total current liabilities 4,116
Long-term notes payable to related parties 2,970
Long-term notes payable, other 970
Long-term notes payable to bank 238
Long-term payable-royalty agreements, less current portion $269 25
Deferred income 93
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Total liabilities 8,412
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, $.10 par value; authorized, 7,500,00 shares;
issued and outstanding, 4,135,162 shares 413
Additional paid-in capital 4,222
Accumulated deficit (6,605)
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Total stockholders' deficiency (1,970)
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TOTAL $ 6,442
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</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
----------- ------------ ----------- -----------
UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues $ 2,166 $ 2,415 $ 7,017 $ 6,860
Less: Sales returns (199) (158) (556) (503)
Cash discounts and others (18) (20) (59) (85)
---------- ---------- ---------- ----------
Net revenues 1,949 2,237 6,402 6,272
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 968 910 2,848 2,674
Selling and advertising expense 901 866 2,690 2,405
General and administrative expense 693 470 1,777 1,270
---------- ---------- ---------- ----------
Total costs and expenses 2,562 2,246 7,315 6,349
---------- ---------- ---------- ----------
(Loss) from operations (613) (9) (913) (77)
Other income 18 19 54 65
---------- ---------- ---------- ----------
Net income (loss) $ (595) $ 10 $ (859) $ (12)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share:
Net income (loss) $ (.14) $ .00 $ (.20) $ .00
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
1998 1997
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (859) $ (12)
---------- ----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 83
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . 701 1,035
(Decrease) in deferred income . . . . . . . . . . . . . . . . . . . . . (49) (49)
(Gain) on disposal of property, plant, and equipment. . . . . . . . . . (5) (16)
Change in operating assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . 565 203
(Increase) in due from related party. . . . . . . . . . . . . . . . . . (135) (21)
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . (148) 166
Decrease (increase) in other current assets . . . . . . . . . . . . . . 520 (62)
(Decrease) in accounts payable. . . . . . . . . . . . . . . . . . . . . (12) (448)
Increase (decrease) in account payable related party. . . . . . . . . . 75 (50)
Increase in notes payable related party . . . . . . . . . . . . . . . . 90
(Decrease) increase in notes payable, other . . . . . . . . . . . . . . (48) 45
Increase in accrued liabilities - environmental cleanup . . . . . . . . 201
Increase in other accrued liabilities . . . . . . . . . . . . . . . . . 256 133
(Decrease) in accrued royalties . . . . . . . . . . . . . . . . . . . . (856) (76)
---------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,248 943
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 389 931
---------- ----------
Cash flows from investing activities:
Additions to property, plant, and equipment . . . . . . . . . . . . . . (61) (111)
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . 5 16
Acquisition of product brands . . . . . . . . . . . . . . . . . . . . . (70) (1,092)
Increase in long-term deposits. . . . . . . . . . . . . . . . . . . . . (12)
---------- ----------
Net cash (used in) investing activities . . . . . . . . . . . . . . . (138) (1,187)
---------- ----------
Cash flows from financing activities:
(Payments on) bank loans. . . . . . . . . . . . . . . . . . . . . . . . (14) (61)
(Payments on) proceeds from notes payable to related party. . . . . . . (94) 80
Proceeds from notes payable, other. . . . . . . . . . . . . . . . . . . 3 633
(Decrease) in long-term royalty agreements. . . . . . . . . . . . . . . (96) (495)
(Decrease) increase in bank overdraft . . . . . . . . . . . . . . . . . (65) 114
---------- ----------
Net cash (provided by) used in financing activities . . . . . . . . . (266) 271
---------- ----------
Net (decrease) increase in cash. . . . . . . . . . . . . . . . . . . . . . (17) 15
Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . 26 13
---------- ----------
Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 $ 28
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 394 $ 428
---------- ----------
---------- ----------
Acquisition of product brands:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . $ 70 $ 1,497
Fair value of liabilities incurred. . . . . . . . . . . . . . . . . . . 405
---------- ----------
Net cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 1,092
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements.
<PAGE>
FORM 10-QSB
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of June 30, 1998, and the statements of
operations and cash flows for the periods ended June 30, 1998, and 1997,
have not been audited by independent accountants but reflect all
adjustments, consisting of any normal recurring adjustments, which are, in
the opinion of management, necessary to a fair statement of the results for
such periods. The results of operations for the nine months ended June 30,
1998, are not necessarily indicative of results to be expected for the year
ending September 30, 1998.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities
and Exchange Commission, although the Company believes that the disclosures
included in these financial statements are adequate to make the information
not misleading.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1997.
The Company is involved in various matters involving environmental cleanup
issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
Operations" and Note 10 of Notes to Financial Statements included in the
Company's Form 10-KSB for the fiscal year ended September 30, 1997. The
ultimate outcome of these matters cannot presently be determined.
Environmental expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are expensed. The Company's proportionate share of the
liabilities are recorded when environmental remediation and/or cleanups are
probable, and the costs can be reasonably estimated.
2. Continued existence:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's recurring past
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. 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 continued as
a going concern.
3. Net loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock
equivalents (common stock options) are not included in these calculations
where their effect on net loss per share is anti-dilutive. The weighted
average number of shares was 4,135,162 for all periods presented.
4. Note payable to bank:
Effective April 26, 1996, the Company renewed its real estate loan with the
bank. The note payable to the bank, secured by deed on land and building,
requires a monthly payment of $4,200, including interest at Bank of
America's base rate plus 4%, maturing March 2001. At June 30, 1998, the
interest rate was 12.5%. The note is guaranteed by the former Chairman of
the Company and the Company's President.
5. Line of credit:
During May of 1998, the Company renewed its revolving credit facility. It
is a two-year agreement maturing in May 2000. The total revolving line of
credit facility is $1,100,000, including a $400,000 loan secured by the
Company's inventory at a rate of prime plus 6%. Additionally, an equipment
loan of $400,000 at a rate of prime plus 6% was made available. The
accounts receivable revolving credit facility is at a rate of prime plus
5%. The renewed interest rate is lower by 3% from the initial revolving
credit facility agreement. The equipment loan is amortized over 48 months
with a balloon payment on May 21, 2000. There is no prepayment penalty on
either the equipment or inventory loan. The accounts receivable line of
credit could be paid off after May 20, 1999, with a 90 day advance notice
<PAGE>
FORM 10-QSB
and $15,000 prepayment penalty. The accounts receivable line of credit
plus the inventory and equipment loans, in the aggregate, are subject to a
minimum interest of $3,000 per month. The new loan agreement is personally
guaranteed by the Company's president.
6. Acquisitions:
On October 16, 1996, the Company purchased certain assets from Lactona
Corporation for $175,000 including inventory valued at approximately
$30,000. The Company remitted $75,000 at closing. Payments of $3,000,
including interest, are due the 16th of each month starting November 1996
and ending September 1999 and any remaining amount on October 16, 1999.
Interest is to be computed at the highest prime rate during the payment
period. The highest prime rate was 8.25% on March 16, 1997.
On October 21, 1996, the Company purchased certain assets from Roberts
Laboratories, Inc. for $1,168,089. The Company remitted $100,000 at
closing. Payments of $19,752 are due on the first of each month starting
November 1, 1996, and ending on October 1, 2000. Any remaining unpaid
balance is due on November 1, 2000. Interest shall be paid at the highest
prime rate during the preceding month.
On September 8, 1997, the Company purchased certain assets of the
Klutch-Registered Trademark-denture adhesive powder line from I. Putnam,
Inc. for $320,000. The Company remitted $225,000 at closing and is
required to make one payment of $7,000 plus interest, and eleven equal
monthly payments of $8,000, plus interest at the prime rate. In addition,
the Company purchased certain inventories from I. Putnam, Inc. for $51,063
at closing.
On February 17, 1998, the Company purchased certain assets of the
Painalay-Registered Trademark- throat spray line from Medtech Inc. for
$70,000. The Company is required to make five payments of $14,000 each
plus interest at 10% starting 61 days after the close. In addition, the
Company purchased for cash inventory valued at $27,764.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998, AND JUNE 30, 1997
Gross revenues for the three months ended June 30, 1998, were $2,166,000, a
decrease of approximately $249,000 or 10% from the comparable three months
ended June 30, 1997. The decrease in gross revenues was due to the decline
in volume generated from the depilatories, nail products, oral rinse
powder, and the 28 items (acquired in October 1996) which includes
ointments, nutritional supplements, vitamins, analgesics and various
over-the-counter brands. On the other hand, the above decreases in
sales volume were partially offset by increases in sales volume of
Lee-Registered Trademark-Lip-Ex-TM-, lip balm plus the added sales of the
newly acquired Klutch-Registered Trademark- and Painalay-Registered
Trademark- brands.
Net revenues decreased approximately $288,000 or 13% for the three months
ended June 30, 1998, as compared to the three months ended June 30, 1997.
The change in net revenues was due to the same explanation of the decrease
in gross revenues discussed above. In addition, the sales returns
increased $41,000 or 26% when comparing the three months ended June 30,
1998 and 1997. The higher sales returns during the current quarter are
attributable to the higher than normal level of returns related to the
depilatory category.
Cost of sales as a percentage of gross revenues was 45% for the quarter
ended June 30, 1998, compared to 38% for the quarter ended June 30, 1997.
The cost of sales percentage was higher due to increased raw material
purchases (normal quantity reordered, per purchase order, was tripled for
certain high turnover items), increased manufacturing labor dollars as a
result of two (September 1997 and March 1998) hourly rate increase
increases (15%) in minimum wages and sale of some slow moving finished
goods at lower than normal margins.
Selling and advertising expenses increased $35,000 or 4% when comparing the
three months ended June 30, 1998, with the three months ended June 30,
1997. The increases in expenses were mainly due to the following factors;
(1) an increase in the amortization expense (approximately $13,000), and
(2) an increase in salaries and wages plus related fringe benefits
($88,000) as a result of new hires
<PAGE>
FORM 10-QSB
which included the addition of two outside salesmen, and higher related
travel and entertainment expenses. The above increases were partially
offset by a decrease in the Company's co-operative advertising costs of
approximately $53,000 when comparing the quarters ended June 30, 1998 and
1997.
General and administrative expenses increased when comparing the quarters
ended June 30, 1998 and 1997. The increase of $223,000 or 47% was the
result of; (1) employee new hires (salary and wages) plus related fringe
benefits, (2) an accrual of $79,000 (non-recurring) related to the Monterey
Park waste site cleanup, (3) an accrual of $122,000 related to the
Company's best estimate of its share of the remediation costs as described
under "Environmental Matters," and (4) increased interest expense of
approximately $28,000 as a result of increased borrowings from the
Company's asset based financing lender.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998, AND JUNE 30, 1997
Gross revenues for the nine months ended June 30, 1998, were $7,017,000, an
increase of approximately $157,000 or 2% from the comparable nine months
period ended June 30, 1997. The increase in gross revenues was due to the
volume generated from the recently acquired brands such as:
Klutch-Registered Trademark- and Painalay-Registered Trademark-, plus the
in-house product Lee-Registered Trademark- Lip-Ex-TM-, and the depilatory
category. The above increased sales volume was partially offset by reduced
sales revenues of the nail category products. Net revenues for the nine
months ended June 30, 1998, were $6,402,000, an increase of $130,000 or 2%
from the comparable nine months period ended June 30, 1997. The reasons
for higher sales returns during the nine months period ended June 30, 1998,
versus June 30, 1997, was due to a higher level of returns related to the
depilatory category which was offset in-part by lower nail extender product
returns.
Cost of sales as a percentage of gross revenues for the nine months ended
June 30, 1998, as compared to the nine months period ended June 30, 1997,
was 41% versus 39%, respectively. The slightly higher cost of sales
percentage for the nine months ended June 30, 1998, compared to June 30,
1997, is due to the product mix in addition to the explanation above
regarding the material changes for the three months ended June 30, 1998,
versus 1997.
Selling and advertising expenses increased $285,000 or 12% when comparing
the nine months ended June 30, 1998, with the nine months ended June 30,
1997. The increased expenses were primarily due to: (1) an increase in
the amortization expense, (2) an increase in salaries and wages plus fringe
benefits, the result of new hires which includes two outside salesmen, and
higher related travel and entertainment expenses, (3) higher manufacture
representative commissions, (4) higher product samples expense related to
the new brand acquisitions, and (5) increased freight costs. The
aforementioned increased expenses were offset, in part, by a decrease in
the cooperative advertising and print media advertising costs.
General and administrative expenses increased $507,000 or 40% when
comparing the nine months ended June 30, 1998, with the nine months ended
June 30, 1997. This significant increase was principally due to; (1)
employee new hires (salary and wages) plus related fringe benefits, (2) an
accrual of $79,000 (non-recurring) related to the Monterey Park waste site
cleanup, (3) an accrual of $122,000 related to the Company's best estimate
of its share of the remediation costs as described under "Environmental
Matters," (4) increased interest expense of approximately $64,000 as a
result of increased borrowings from the Company's asset based financial
lender, and (5) slightly higher supplies and printing costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, working capital was $114,000 and at June 30, 1998,
the working capital was a negative $346,000, thus a decrease of $460,000.
The ratio of current assets to current liabilities was .9 to 1 at June 30,
1998, and 1.0 to 1 at September 30, 1997. The decrease in working capital
of $460,000 (from a positive $114,000 to a negative $346,000) was basically
due to a decrease in accounts receivable, prepaid royalties, and an
increase in environmental cleanup cost liability.
The Company has an accumulated deficit of $6,605,000. 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 retaining current financing and achieving a
level of profitable operations sufficient to enable it to meet its
obligations as they become due.
<PAGE>
FORM 10-QSB
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB") ordered the Company in 1988 and 1989 to investigate the
contamination on its property (relating to soil and groundwater
contamination). The Company engaged a consultant who performed tests and
reported to the then Chairman of the Company. The Company resisted further
work on its property until the property upgradient was tested in greater
detail since two "apparent source" lots had not been tested. On August 12,
1991, the RWQCB issued a "Cleanup and Abatement Order" directing the
Company to conduct further testing and cleanup the site. In October 1991,
the Company received from an environmental consulting firm an estimate of
$465,200 for investigation and cleanup costs. The Company believed that
this estimate was inconclusive and overstated the contamination levels.
The Company believes that subsequent investigations will support the
Company's conclusions about that estimate. The Company did not complete
the testing for the reasons listed above as well as "financial
constraints". In June 1992 the RWQCB requested that the EPA evaluate the
contamination and take appropriate action. At the EPA's request, Ecology &
Environment, Inc. conducted an investigation of soil and groundwater on the
Company's property. Ecology & Environment Inc.'s Final Site Assessment
Report, which was submitted to the EPA in June 1994, did not rule out the
possibility that some of the contamination originated on-site, and resulted
from either past or current operations on the property. The Company may be
liable for all or part of the costs of re mediating the contamination on
its property. The EPA has not taken any further action in this matter, but
may do so in the future.
The Company and nearby property owners, in consort with their comprehensive
general liability (GLC) carriers, have engaged a consultant to perform a
site investigation with respect to soil and shallow groundwater
contamination over the entire city block. The CGL carriers provided
$290,000 in funding which paid for the $220,000 study, $20,000 in legal
fees for project oversight, and a $50,000 balance in the operating fund.
Earlier the Company had accrued $87,500 as its proportionate share of the
earlier quote of $175,000. Since that time, the overall scope of the
project was increased to $205,000 plus $15,000 for waste water disposal,
bringing the total to the above listed $220,000. The $87,500 accrual was
not spent on this project (as the entire cost was borne by the
comprehensive general liability carriers), but remains on the books as an
accrual against the cost of remediation of the same site that was included
in the study.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination
on the properties leased by the tenants. The case name is DEL RAY
INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los Angeles County
Superior Court, Northwest District, commenced August 21, 1991. In this
action, the plaintiff alleges environmental contamination by defendants of
its property, and seeks a court order preventing further contamination and
monetary damages. The Company does not believe there is any basis for the
allegations and is vigorously defending the lawsuit.
The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater which is part of
the San Gabriel Valley Superfund site. The Company has been notified that
it is a potentially responsible party ("PRP") for the contamination. In
1995, the Company was informed that the EPA estimated the cleanup costs for
the South El Monte's portion of the San Gabriel Valley Superfund site to be
$30 million. The Company's potential share of such amount has not been
determined. Superfund PRPs are jointly and severally liable for superfund
site costs, and are responsible for negotiating among themselves the
allocation of the costs based on, among other things, the outcome of
environmental investigation.
In August 1995 the Company was informed that the EPA entered into an
Administrative Order of Consent with Cardinal Industrial Finishes
("Cardinal") for a PRP lead remedial investigation and feasibility study
(the "Study") which, the EPA states, will both characterize the extent of
groundwater contamination in South El Monte and analyze alternatives to
control the spread of contamination. The Company and others have entered
into the South El Monte Operable Unit Site Participation Agreement with
Cardinal pursuant to which, among other things, Cardinal will contract with
an environmental firm to conduct the Study. The Study has been completed
but the final program has not been reported. The Company's share of the
cost of the Study is currently $15,000 and was accrued for in the financial
statements as of September 30, 1995.
The City of South El Monte, the city in which the Company has its
manufacturing facility, is located in the San Gabriel Valley. The San
Gabriel Valley has been declared a Superfund site. The 1995 Water Quality
Control Plan issued by the California Regional Water Quality Control Board
states that the primary groundwater basin pollutants in the San
Gabriel Valley are volatile organic compounds from
<PAGE>
FORM 10-QSB
industry, nitrates from subsurface sewage disposal and past agricultural
activities. In addition, the Plan noted that hundreds of underground
storage tanks leaking gasoline and other toxic chemicals have existed in
the San Gabriel Valley. The California Department of Toxic Substance
Control have declared large areas of the San Gabriel Valley to be
environmentally hazardous and subject to cleanup work.
The Company believes the City of South El Monte does not appear to be
located over any of the major plumes. However, the EPA recently announced
it is studying the possibility that, although the vadose soil and
groundwater, while presenting cleanup problems, there may be a
contamination by DNAPs (dense non-aqueous phase liquids), i.e., "sinkers",
usually chlorinated organic cleaning solvents. The EPA has proposed to
drill six "deep wells" throughout the City of South El Monte at an
estimated cost of $1,400,000. The EPA is conferring with SEMPOA (South El
Monte Property Owners Association) as to cost sharing on this project.
SEMPOA has obtained much lower preliminary cost estimates. The outcome
cost and exact scope of this are unclear at this time.
The Company and other property owners engaged Geomatrix Consultants, Inc.,
to do a survey of vadose soil and shallow groundwater in the "hot spots"
detected in the previous studies. Geomatrix issued a report dated December
1, 1997 (the "Report"), on the impact of volatile organic compounds on the
soil and groundwater at the Lidcombe and Santa Anita Avenue site located in
South El Monte, California (which includes the Company's facilities). The
Report indicated generally low concentrations of tetrachloroethene,
trichloaethene and trichloroethane in the groundwater of the upgradient
neighbor. The Report was submitted to the RWQCB for its comments and
response. A meeting with the parties and RWQCB was held on February 10,
1998. The RWQCB had advised companies that vadose soil contamination is
minimal and requires no further action. However, there is an area of
shallow groundwater which has a higher than desired level of chlorinated
solvents, and the RWQCB requested a proposed work plan be submitted by
Geomatrix. Geomatrix has submitted a "Focused Feasibility Study" which
concludes that there are five possible methods for cleanup. The most
expensive are for a pump and sewer remediation which would cost between
$1,406,000 and $1,687,000. The Company is actively exploring the less
expensive alternative remediation methods, of which the two proposed
alternatives range in cost between $985,000 and $1,284,000. Accordingly,
the Company has taken the average of the two amounts ($985,000 and
$1,284,000) as the total amount of estimated cost. Since there are four
economic entities involved, the Company's best estimate at this time, in
their judgment, would be that their forecasted share would be 25% or
$284,000 less the liability already recognized on the books of $162,000
thereby requiring an additional $122,000 liability. Accordingly, the
Company recorded an additional accrual of $122,000 in the third quarter of
fiscal 1998. The $122,000 accrual is in addition to the $79,000 accrual
for the Monterey Site as will be explained in the following paragraph. The
$79,000 accrual, in the third quarter of fiscal 1998, related to the
Monterey Site is not included in the $284,000 figure above. No assurances
can be given that any of the alternative remediation methods will be
feasible or that the actual cost to the Company of the remediation will not
exceed the amount of the Company's current accruals of $284,000 (which
includes the $122,000 charge to income for this quarter).
Without any prior correspondence or inkling of the Company's potential
liability, the EPA has recently informed the Company that the Company may
have potential liability for the ongoing remediation of Operating
Industries, Inc. (as they have gone out of business) Landfill Superfund
Site in Monterey Park, California (the "Monterey Site"). The Monterey Site
is a 190 acre landfill that operated from 1948 to 1984, in which the
Company disposed of non toxic pH balanced waste water on six occasions
between 1974 and 1978. Over 4,000 companies have been identified as having
contributed waste to the Monterey Site. The EPA has offered to settle the
Company's potential liability with respect to the Monterey Site for a cost
to the Company of $79,233. The Company accrued a $79,000 charge in the
third quarter of fiscal 1998 with respect to this possible liability. The
Company has forwarded this proposal to its environmental counsel for their
review of the Company's available options.
The Company continues to seek reimbursement from various CGL carriers,
although there can be no assurances that any such payments will be
received. Some carriers have denied liability for 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.
The total amount of environmental investigation and cleanup costs that the
Company may incur with respect to the foregoing is not known at this time.
However, based upon information available to the Company at this time, the
Company has expensed since 1988 a total of $486,000, of which $89,000 were
legal fees, exclusive of legal fees expended in connection with the SEC
environmental investigation. The actual costs could differ materially from
the amounts expensed for environmental investigation and cleanup costs to
date.
<PAGE>
FORM 10-QSB
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations - Environmental Matters" is incorporated herein
by reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1997.
Item 6. Exhibits
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 - Modification of loan and security agreement dated May
21, 1996, between Lee Pharmaceuticals and Preferred
Business Credit, Inc. regarding a revolving credit
facility financing.
10.2 - Modification of secured promissory note dated August
29, 1997, between Lee Pharmaceuticals and Preferred
Business Credit, Inc.
10.3 - Secured promissory note dated May 15, 1998, between Lee
Pharmaceuticals and Preferred Business Credit, Inc.
10.4 - Continuing guaranty dated May 15, 1998, between Lee
Pharmaceuticals and Preferred Business Credit, Inc.
27 - Financial Data Schedule
(1) Filed as an Exhibit of the same number with the Company's Form
S-1 Registration Statement filed with the Securities and
Exchange Commission on February 5, 1973, (Registrant No.
2-47005), and incorporated herein by reference.
(2) Filed as Exhibits 3.4 and 3.5 with the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1978,
filed with the Securities and Exchange Commission and
incorporated herein by reference.
(3) Filed as an Exhibit of the same number with the Company's Form
10-K Annual Report for the fiscal year ended September 30,
1979, filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE>
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Securities Exchange Acts of
1934, the registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LEE PHARMACEUTICALS
-------------------
(Registrant)
Date: August 3, 1998 Ronald G. Lee
------------------ ----------------------------------
Ronald G. Lee
President (Chief Executive Officer
and Chief Financial Officer)
<PAGE>
EXHIBIT 10.1
PAGE 1 of 2
MODIFICATION OF LOAN AND SECURITY AGREEMENT
WHEREAS this agreement is in reference to a loan which is evidenced by an
instrument entitled LOAN AND SECURITY AGREEMENT ("AGREEMENT"), dated May 21,
1996, executed by and between LEE PHARMACEUTICALS as "BORROWER" and PREFERRED
BUSINESS CREDIT, INC. ("PBC"), as "LENDER."
NOW THEREFORE, it is agreed by the undersigned parties that the AGREEMENT
shall be amended in the following respect:
In Section 2.1(a) of the Agreement, PBC agrees to make revolving
advances to Borrower in an amount equal to the lesser of (I) Seventy
five percent (75%) of the amount of Eligible Accounts; and (II) an
amount equal to Borrower's cash collections for the immediately
preceding forty-five (45) day period.
In Section 2.1(b) of the Agreement, PBC agrees to make revolving
advances to Borrower in an amount equal to the lesser of (I) twenty five
percent (25%) of the amount of Eligible Inventory, (II) the outstanding
balance of advances against Eligible Accounts and (III) Four Hundred
Thousand and 00/100 Dollars ($400,000.00) evidenced by a Secured
Promissory Note dated May 15, 1998.
In Section 2.1 of the Agreement, PBC shall have no obligation to make
advances hereunder to the extent they would cause the outstanding
balance of revolving advances under this Section 2.1 to exceed a maximum
amount of One Million One Hundred Thousand and 00/100 Dollars
($1,100,000.00).
In Section 2.4(a) of the Agreement, The obligations shall bear interest,
on the average Daily Balance, at a rate of Five percentage points (5%)
above the Prime Rate.
In Section 3.1 of the Agreement, This Agreement shall become effective
and shall continue in full force and effect for a term ending May 21,
2000.
In Section 3.3 of the Agreement, After May 21, 1999, the Borrower has
the option, on ninety (90) days prior written notice to PBC, to
terminate this Agreement on a date other than an anniversary of the
effective date by paying to PBC, in cash, the Obligation together with
all accrued and unpaid interest and expense and a prepayment penalty of
Fifteen Thousand Dollars ($15,000.00).
<PAGE>
EXHIBIT 10.1
PAGE 2 of 2
Borrower hereby rescind the termination letter dated February 16, 1998.
Except as noted above, all the terms, conditions and provisions of said
AGREEMENT shall remain unchanged and in full force and effect.
DATE: May 15, 1998
PREFERRED BUSINESS CREDIT, INC. AGREED AND ACCEPTED:
LEE PHARMACEUTICALS
BY: /s/ Farhad Motia
----------------------------
Farhad Motia, President
BY: /s/ Ronald G. Lee
------------------------
Ronald G. Lee, President
<PAGE>
EXHIBIT 10.2
MODIFICATION OF SECURED PROMISSORY NOTE
WHEREAS this agreement is in reference to a loan which is evidenced by an
instrument entitled Secured Promissory Note, (NOTE), dated August 29, 1997
executed by LEE PHARMACEUTICALS for the original principal sum of One Hundred
Thirty Eight Thousand and 00/100 Dollars ($138,000.00) and payable to the
order of PREFERRED BUSINESS CREDIT, INC.
Principal balance outstanding on this Note as of this date is EIGHTY THOUSAND
THREE HUNDRED TWENTY SEVEN AND 13/100 DOLLARS ($80,327.13).
NOW THEREFORE, it is agreed by the undersigned parties that the Note shall be
amended in the following respect:
This Note shall bear interest at the rate of 14.5%, computed on the basis of
a 360 day year for actual days elapsed.
The term of this Note shall be extended to May 21, 2000.
Except as noted above, all the terms, conditions and provisions of said Note
shall remain unchanged and in full force and effect.
Date: May 15, 1998 Loan Number: LEE05
PREFERRED BUSINESS CREDIT, INC. LEE PHARMACEUTICALS
a California corporation a California corporation
- ------------------------------ ----------------------------
By: /s/ Farhad Motia By: /s/ Ronald G. Lee
--------------------------- -------------------------
Farhad Motia, President Ronald G. Lee, President
<PAGE>
EXHIBIT 10.3
PAGE 1 of 2
SECURED PROMISSORY NOTE
$400,000.00 Pasadena, California
- ----------- May 15, 1998
FOR VALUE RECEIVED, the undersigned hereby jointly and severally (if
applicable) promises to pay to PREFERRED BUSINESS CREDIT, INC., a California
Corporation, at 300 N. Lake Ave., Pasadena, California, 91101, or at such
other address as the holder may specify in writing, the principal sum of Four
Hundred Thousand and 00/100 Dollars ($400,000.00) plus interest as provided
below.
This note shall bear interest at the rate of 14.50% per annum, computed on
the basis of a 360 day year for actual days elapsed. This rate is based upon
the prime rate of interest of 8.50%, the rate in effect as of this date. The
prime rate of interest is the prime rate announced as being charged by Bank
of America, San Francisco, from time to time. In the event the prime rate is
from time to time hereafter changed, the rate of interest provided in this
note shall be correspondingly changed. For each month the rate of interest
charged under this note shall be based upon the average prime rate in effect
during such month. In no event shall the rate of interest chargeable
hereunder be less than 1% per month.
Principal shall be payable in 10 equal monthly installments of $11,111.00
commencing August 1, 1998 and continue thereafter on the 1st day of each
month, plus interest shall be payable monthly commencing June 1, 1998 and
continue thereafter on the 1st day of each month, and one final installment
on May 21, 2000 equal to all principal outstanding together with all accrued
and unpaid interest.
This note is secured by that certain Loan and Security Agreement
("Agreement") dated May 21, 1996 and is subject to all of the terms and
conditions thereof. In the event of default under the Agreement, including
but not limited to, the failure to pay any installment of principal or
interest hereunder when due, the holder of this note may, at its election and
without notice to the undersigned, declare the entire balance hereof
immediately due and payable.
If any installment of principal or interest hereunder is not paid when due,
the holder shall have the following rights in addition to the rights set
forth in the preceding paragraph: (a) the right to add unpaid interest
to principal and to have such amount thereafter bear interest as provided in
this note, and (b) if any installment is more than ten days past due, the
right to collect a charge equal to the greater of $15.00 or five percent of
the delinquent payment. This charge is the result of a reasonable endeavor by
the undersigned and the holder to estimate the holder's added costs and
damages resulting from the undersigned's failure to timely make payments
under this note; hence the undersigned agrees that the charge shall be
presumed to be the amount of damage sustained by the holder since it is
extremely difficult to determine the actual amount necessary to reimburse
the holder of such damages. If this note is not paid when due, the
undersigned further promises to pay all costs of collection, foreclosure
fees and reasonable attorneys' fees incurred by the holder whether or not
suit is filed hereon.
<PAGE>
EXHIBIT 10.3
PAGE 2 of 2
Provided the undersigned is not then in default hereunder or under any other
agreement with the holder of this note, this note may be prepaid at any time
after one year from the date hereof by paying the balance of principal owing
plus all accrued and unpaid interest and charges, together with a prepayment
charge of N/A on the amount prepaid.
Presentment for payment, notice of dishonor, protest, and notice of protest
are expressly waived. This note cannot be changed, modified, amended or
terminated orally.
WAIVER OF TRIAL BY JURY. THE UNDERSIGNED, TO THE EXTENT IT MAY LEGALLY DO SO,
HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS
NOTE, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE
DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS NOTE OR THE TRANSACTIONS
RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE
UNDERSIGNED, TO THE EXTENT IT MAY LEGALLY DO SO, HEREBY AGREES THAT ANY SUCH
CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A
COURT TRIAL WITHOUT A JURY AND THAT THE HOLDER OF THIS NOTE MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE UNDERSIGNED TO THE WAIVER OF ITS RIGHT TO
TRIAL BY JURY.
IN WITNESS WHEREOF, this Note has been executed and delivered on the date
first set forth above.
LEE PHARMACEUTICALS
a California corporation
By: /s/ Ronald G. Lee
------------------------
Ronald G. Lee, President
<PAGE>
EXHIBIT 10.4
PAGE 1 of 8
CONTINUING GUARANTY
THIS CONTINUING GUARANTY ("Guaranty"), dated as of May 15, 1998, is
executed and delivered by Ronald G. Lee, ("Guarantor") in favor of PREFERRED
BUSINESS CREDIT, INC., a California Corporation ("PBC") and in light of the
following:
FACT ONE: Borrower and PBC are, contemporaneously herewith, entering
into the Loan Documents; and
FACT TWO: In order to induce PBC to extend financial accommodation to
LEE PHARMACEUTICALS, a California corporation, ("Borrower") pursuant to the
Loan Documents, and in consideration thereof, and in consideration of any
loans or other financial accommodations heretofore or hereafter extended by
PBC to Borrower, whether pursuant to the Loan Documents or otherwise,
Guarantor has agreed to guarantee the Guaranteed Obligations.
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of PBC, as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITION. The following terms, as used in this Guaranty,
shall have the following meanings:
"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (11
U.S.C. Sections 101-1330), as amended or supplemented from time to time, and
any successor statute, and any and all rules issued or promulgated in
connection therewith.
"GUARANTEED OBLIGATIONS" means any and all obligations,
indebtedness, or liabilities of any kind or character owed by Borrower to PBC
including all such obligations, indebtedness, or liabilities, whether for
principal, interest (including any interest which, but for the application of
the provisions of the Bankruptcy Code, would have accrued on such amounts),
premium, reimbursement obligations, fees, costs, expenses (including,
attorneys' fees), or indemnity obligations, whether heretofore, now, or
hereafter made, incurred, or created, whether voluntarily or involuntarily
made, incurred, or created, whether secured or unsecured (and if secured,
regardless of the nature of extent of the security), whether absolute or
contingent, liquidated or unliquidated, determined or indeterminate, whether
Borrower is liable individually or jointly with others, and whether recovery
is or hereafter becomes barred by any statute of limitations or otherwise
becomes unenforceable for any reason whatsoever, including any act or failure
to act by PBC.
"LOAN DOCUMENTS" shall mean that certain Loan and Security
Agreement dated May 21, 1996 between PBC and Borrower, any promissory notes
issued by Borrower in connection therewith, and those documents, instruments,
and agreements which either now or in the future exist among Borrower,
Guarantor, or any affiliate of Borrower, on the one hand, and PBC, on the
other hand.
1
<PAGE>
EXHIBIT 10.4
PAGE 2 of 8
(b) CONSTRUCTION. Unless the context of this Guaranty clearly
requires otherwise, references to the plural include the singular, references
to the singular include the plural, and the term "including" is not limiting.
The words "hereof," "herein," "hereby," "hereunder," and other similar terms
refer to this Guaranty as a whole and not to any particular provision of this
Guaranty. Any reference herein to any of the Loan Documents includes any and
all alterations, amendments, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable. Neither this Guaranty nor any
uncertainty or ambiguity herein shall be construed or resolved against PBC or
Guarantor, whether under any rule of construction or otherwise. On the
Contrary, this Guaranty has been reviewed by Guarantor, PBC, and their
respective counsel, and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplished the purposes
and intentions of PBC and Guarantor.
2. GUARANTEED OBLIGATIONS. Guarantor hereby irrevocably and
unconditionally guarantees to PBC, as and for its own debt, until final and
indefeasible payment thereof has been made, (a) payment of the Guaranteed
Obligations, in each case when and as the same shall become due and payable,
whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the
guaranty set fourth herein shall be a guaranty of payment and not a guaranty
of collection; and (b) the punctual and faithful performance, keeping,
observance, and fulfillment by Borrower of all of the agreements, conditions,
covenants, and obligations of Borrower contained in the Loan Documents.
3. CONTINUING GUARANTY. This Guaranty includes Guaranteed Obligations
arising under successive transactions continuing, compromising, extending,
increasing, modifying, releasing, or renewing the Guaranteed Obligations,
changing the interest rate, payment terms, or other terms and conditions
thereof, or creating new or additional Guaranteed Obligations after prior
Guaranteed Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, Guarantor hereby waives any right to revoke
this Guaranty as to future indebtedness. If such a revocation is effective
notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that
(a) no such revocation shall be effective until written notice thereof has
been received by PBC, (b) no such revocation shall apply to any Guaranteed
Obligations in existence on such date (including, any subsequent
continuation, extension, or renewal thereof, or change in the interest rate,
payment terms, or other terms and conditions thereof), (c) no such revocation
shall apply to any Guaranteed Obligations made or created after such date to
the extent made or created pursuant to a legally binding commitment of PBC in
existence on the date of such revocation, (d) no payment by Guarantor,
Borrower, or from any other source, prior to the date of such revocation
shall reduce the maximum obligation of Guarantor hereunder, and (e) any
payment by Borrower or from any source other than Guarantor, subsequent to
the date of such revocation, shall first be applied to that portion of the
Guaranteed Obligations as to which the revocation is effective and which are
not, therefore, guaranteed hereunder, and to the extent so applied shall not
reduce the maximum obligation of Guarantor hereunder.
4. PERFORMANCE UNDER THIS GUARANTY. In the event that Borrower fails
to make any payment of any Guaranteed Obligations on or before the due date
thereof, or if Borrower shall fail to perform, keep, observe, or fulfill any
other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Loan Documents, Guarantor immediately shall cause such
payment to be made or each of such obligations to be performed, kept,
observed, or fulfilled.
2
<PAGE>
EXHIBIT 10.4
PAGE 3 of 8
5. PRIMARY OBLIGATIONS. This Guaranty is a primary and original
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity
or irregularity with respect to the issuance of the Notes. Guarantor agrees
that it is directly, jointly and severally with any other guarantor of the
Guaranteed Obligation, liable to PBC, that the obligations of Guarantor
hereunder are independent of the obligations of Borrower or any other
guarantor, and that a separate action may be brought against Guarantor
whether such action is brought against Borrower or any other guarantor or
whether Borrower or any such other guarantor is joined in such action.
Guarantor agrees that its liability hereunder shall be immediate and shall
not be contingent upon the exercise or enforcement by PBC of whatever
remedies it may have against Borrower or any other guarantor, or the
enforcement of any lien or realization upon any security PBC may at any time
possess. Guarantor agrees that any release which may be given by PBC to
Borrower or any guarantor shall not release Guarantor. Guarantor consents and
agrees that PBC shall be under no obligation to marshal any assets of
Borrower or any other guarantor in favor of Guarantor, or against or in
payment of any or all of the Guaranteed Obligations.
6. WAIVERS.
(a) Guarantor hereby waives: (1) notice of acceptance hereof; (2)
notice of any loans or other financial accommodations made or extended under
the Loan Documents or the creation or existence of any Guaranteed
Obligations; (3) notice of the amount of the Guaranteed Obligations, subject,
however, to Guarantor's right to make inquiry of PBC to ascertain the amount
of the Guaranteed Obligations at any reasonable time; (4) notice of any
adverse change in the financial condition of Borrower or of any other fact
that might increase Guarantor's risk hereunder; (5) notice of presentment for
payment, demand, protest, and notice thereof as to any promissory notes or
other instruments among the Loan Documents; (6) notice of any event of
default under the Loan Documents; and (7) all other notices (except if such
notice is specifically required to be given to Guarantor hereunder or under
any Loan Document to which Guarantor is a party) and demands to which
Guarantor might otherwise be entitled.
(b) To the maximum extent permitted by law, Guarantor hereby waives
the right by statute or otherwise to require PBC to institute suit against
Borrower or to exhaust any rights and remedies which PBC has or may have
against Borrower. In this regard, Guarantor agrees that it is Bound to the
payment of all Guaranteed Obligations, whether now existing or hereafter
accruing, as fully as if such Guaranteed Obligations were directly owing to
PBC by Guarantor. Guarantor further waives any defense arising by reason of
any disability or other defense (other than the defense that the Guaranteed
Obligations shall have been fully and finally performed and indefeasibly
paid) of Borrower or by reason of the cessation from any cause whatsoever of
the liability of Borrower in respect thereof.
(c) To the maximum extent permitted by law, Guarantor hereby
waives: (1) any rights to assert against PBC any defense (legal or
equitable), set-off, counterclaim, or claim which Guarantor may now or at any
time hereafter have against Borrower or any other party liable to PBC; (2)
any defense, set-off, counterclaim, or claim, of any kind or nature, arising
directly or indirectly from the present or future lack of perfection,
sufficiency, validity, or enforceability of the Guaranteed Obligations or any
security therefor; (3) any defense arising by reason of any claim of defense
based upon an election or remedies by PBC including the provisions of
Sections 580d and 726 of the California Code of Civil Procedure, or any
similar law of California or any other jurisdiction; (4) the guarantor
expressly waives
3
<PAGE>
EXHIBIT 10.4
PAGE 4 of 8
any and all defenses in its favor based upon an election of remedies by the
PBC which destroys, diminishes or affects the guarantor's subrogation rights
against the borrower and/or the guarantor's rights to proceed against the
borrower for reimbursement, contribution, indemnity or otherwise, including
without limitation any election(s) by PBC to conduct a nonjudicial fore
closure sale under any deed(s) of trust, and further including without
limitation any and all defenses, rights or stoppels which might otherwise
arise under or in connection with California Civil Code of Civil Procedure
("CCP") Section 580d or 580a as a result of any such election(s) or
otherwise. The guarantor acknowledges and agrees that it is knowingly waiving
in advance as a result of the foregoing sentence a complete or partial
defense to its guaranty it may later have had arising from CCP Section 580d
or 580a based upon PBC's subsequent election to conduct a private nonjudicial
foreclosure sale, even though such election would destroy, diminish or affect
the guarantor's rights of subrogation against the borrower and the
guarantor's rights to pursue the borrower for reimbursement, contribution,
indemnity or otherwise. (5) the benefit of any statute of limitations
affecting Guarantor's liability hereunder or the enforcement thereof, and any
act which shall defer or delay the operation of any statute of limitations
applicable to the Guaranteed Obligations shall similarly operate to defer or
delay the operation of such statute of limitations applicable to guarantor's
liability hereunder.
(d) To the maximum extent permitted by law, Guarantor hereby waives
any right of subrogation Guarantor has or may have as against Borrower with
respect to the Guaranteed Obligations. In addition, Guarantor hereby waives
any right to proceed against Borrower, now or hereafter, for contribution,
indemnity, reimbursement, and any other suretyship rights and claims, whether
direct or indirect, liquidated or contingent, whether arising under express
or implied contract or by operation of law, which Guarantor may now have or
hereafter have as against the Borrower with respect to the Guaranteed
Obligations. Guarantor also hereby waives any rights to recourse to or with
respect to any asset of Borrower Guarantor agrees that in light of the
immediately forgoing waivers, the execution of this Guaranty shall not be
deemed to make Guarantor a "creditor" of Borrower, and that for purposes of
Sections 547 and 550 of the Bankruptcy Code Guarantor shall not be deemed a
"creditor" of Borrower.
(e) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY WAIVES, TO THE MAXIMUM
EXTENT PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR
INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTION 2799, 2808,
2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2848, 2849, AND
2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND
726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.
7. RELEASES. Guarantor consents and agrees that, without notice to or
by Guarantor and without affecting or impairing the obligations of Guarantor
hereunder, PBC may, by action or inaction:
(a) compromise, settle, or extend the duration or the time for the
payment of, or discharge the performance of, or may refuse to or otherwise
not enforce the Loan Documents;
(b) release all or any one or more parties to any one or more of the
Loan Documents or grant other indulgences to Borrower in respect thereof;
4
<PAGE>
EXHIBIT 10.4
PAGE 5 of 8
(c) amend or modify in any manner and at any time (or from time to
time) any of the Loan Documents; or
(d) release or substitute any other guarantor, if any, of the
Guaranteed Obligations, or enforce, exchange, release, or waive any security
for the Guaranteed Obligations (including, the collateral referred to in
Section 18 hereof) or any other guaranty of the Guaranteed Obligations, or
any portion thereof.
8. NO ELECTION. PBC shall have the right to seek recourse against
Guarantor to the fullest extent provided for herein, and no election by PBC
to proceed in one form of action or proceeding, or against any party, or on
any obligation, shall constitute a waiver of PBC's right to proceed in any
other form of action or proceeding or against other parties unless PBC has
expressly waived such right in writing. Specifically, but without limiting
the generality of the forgoing, no action or proceeding by PBC under any
document or instrument evidencing the Guaranteed Obligations shall serve to
diminish the liability of Guarantor under this Guaranty except to the extent
that PBC finally and unconditionally shall have realized indefeasible payment
by such action or proceeding.
(9) INDEFEASIBLE PAYMENT. The Guaranteed Obligations shall not be
considered indefeasibly paid for purposes of this Guaranty unless and until
all payments to PBC are no longer subject to any right on the part of any
person, including Borrower, Borrower as a debtor in possession, or any
trustee (whether appointed under the Bankruptcy Code or otherwise) of
Borrower's assets to invalidate or set aside such payments or to seek to
recoup the amount of such payments or any portion thereof, or to declare same
to be fraudulent or preferential. Upon such full and final performance and
indefeasible payment of the Guaranteed Obligations whether by Guarantor or
Borrower, PBC shall have no obligation whatsoever to transfer or assign its
interest in the Loan Documents to Guarantor. In the event that, for any
reason, any portion of such payments to PBC is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, then the obligation
intended to be satisfied thereby shall be revived and continued in full force
and effect as if said payment or payments had not been made, and Guarantor
shall be liable for the full amount PBC is required to repay plus any and all
costs and expenses (including attorneys' fees) paid by PBC in connection
therewith.
10. FINANCIAL CONDITION OF BORROWER. Guarantor represents and warrants
to PBC that Guarantor is currently informed of the financial condition of
Borrower and of all other circumstances which a diligent inquiry would reveal
and which bear upon the risk of nonpayment of the Guaranteed Obligations.
Guarantor further represents and warrants to PBC that Guarantor has read and
understands the terms and conditions of the Loan Documents. Guarantor hereby
covenants that Guarantor will continue to keep informed of Borrower's
financial condition, the financial condition of other guarantors, if any,
and of all other circumstances which bear upon the risk of nonpayment or
nonperformance of the Guaranteed Obligations.
11. SUBORDINATION. Guarantor hereby agrees that any and all present
and future indebtedness of Borrower owing to Guarantor is postponed in favor
of and subordinated to payment, in full, in cash, of the Guaranteed
Obligations. In this regard, no payment of any kind whatsoever shall be made
with respect to such indebtedness until the Guaranteed Obligations have been
indefeasibly paid in full.
5
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EXHIBIT 10.4
PAGE 6 of 8
12. PAYMENTS; APPLICATION. All payments to be made hereunder by
Guarantor shall be made in lawful money of the United States of America at
the time of payment, shall be made in immediately available funds, and shall
be made without deduction (whether for taxes or otherwise) or offset. All
payments made by Guarantor hereunder shall be applied as follows: first, to
all costs and expenses (including attorneys' fees) incurred by PBC in
enforcing this Guaranty or in collecting the Guaranteed Obligations; second,
to all accrued and unpaid interest, premium, if any, and fees owing to PBC
constituting Guaranteed Obligations; and third, to the balance of the
Guaranteed Obligations.
13. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay, on demand, all
reasonable attorneys' fees and all other costs and expenses which may be
incurred by PBC in the enforcement of this Guaranty or in any way arising out
of, or consequential to the protection, assertion, or enforcement of the
Guaranteed Obligations (or any security therefor), whether or not suit is
brought.
14. INDEMNIFICATION. Guarantor agrees to indemnify PBC and hold PBC
harmless against all obligations, demands, or liabilities asserted by any
party and against all losses in any way suffered, incurred, or paid by PBC as
a result of or in any way arising out of, following, or consequential to
PBC's transactions with Borrower.
15. NOTICES. All notices or demands by Guarantor or PBC to the other
relating to this Guaranty shall be in writing and either personally served or
sent by registered or certified mail, postage prepaid, return receipt
requested, or by prepaid telex, telefacsimile, or telegram, and shall be
deemed to be given for purposes of this Guaranty on the day that such writing
is received by the party to whom it is sent. Unless otherwise specified in a
notice sent or delivered in accordance with the provisions of this section,
such writing shall be sent, if to Guarantor, then to the attention of Ronald
G. Lee at Guarantor's address set forth on the signature page hereof, and if
to PBC, then as follows:
PREFERRED BUSINESS CREDIT, INC.
300 N. Lake Avenue, Suite 1115
Pasadena, California 91101
Attn.: President
16. CUMULATIVE REMEDIES. No remedy under this Guaranty or under any
Loan Document is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other
remedy given hereunder or under any Loan Document, and those provided by law
or in equity. No delay or omission by PBC to exercise any right under this
Guaranty shall impair any such right nor be construed to be a waiver thereof.
No failure on the part of PBC to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right.
17. BOOKS AND RECORDS. Guarantor agrees that PBC's books and records
showing the account between PBC and Borrower shall be admissible in any
action or proceeding and shall be binding upon Guarantor for the purpose of
establishing the items therein set forth and shall constitute prima facie
proof thereof.
6
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EXHIBIT 10.4
PAGE 7 of 8
18. COLLATERAL. The obligations of Guarantor hereunder are secured, as
provided in that certain n/a.
19. SEVERABILITY OF PROVISION. Any provision of this Guaranty which is
prohibited or unenforceable under applicable law, shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
20. ENTIRE AGREEMENT; AMENDMENTS. This Guaranty constitutes the entire
agreement between Guarantor and PBC pertaining to the subject matter
contained herein. This Guaranty may not be altered, amended, or modified,
nor may any provision hereof be waived or noncompliance therewith consented
to, except by means of a writing executed by both Guarantor and PBC. Any
such alteration, amendment, modification, waiver, or consent shall be
effective only to the extent specified therein and for the specific purpose
for which given. No course of dealing and no delay or waiver of any right or
default under this Guaranty shall be deemed a waiver of any other, similar or
dissimilar right or default or otherwise prejudice the rights and remedies
hereunder.
21. SUCCESSORS AND ASSIGNS. The death of Guarantor shall not terminate
this Guaranty. This Guaranty shall be binding upon Guarantor's heirs,
executors, administrators, representatives, successors, and assigns and shall
inure to the benefit of the successors and assigns of PBC; Provided, however,
Guarantor shall not assign this Guaranty or delegate any of its duties hereunder
without PBC's prior written consent. Any assignment without the consent of PBC
shall be absolutely void. In the event of any assignment or other transfer of
rights by PBC, the rights and benefits herein conferred upon PBC shall
automatically extend to and be vested in such assignee or other transferee.
22. SEPARATE PROPERTY. Any married individual who signs this Guaranty in
his or her individual capacity hereby expressly agrees that recourse may be had
against his or her separate property for all Guaranteed Obligations hereunder.
23. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS GUARANTY, ITS
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF GUARANTOR
AND PBC, SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
GUARANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS GUARANTY SHALL BE TRIED AND DETERMINED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, OR,
AT THE SOLE OPTION OF PBC, IN ANY OTHER COURT IN WHICH PBC SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER
MATTER IN CONTROVERSY. TO THE MAXIMUM EXTENT PERMITTED BY LAW, GUARANTOR
HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT
IN ACCORDANCE WITH THIS SECTION.
24. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY
7
<PAGE>
EXHIBIT 10.4
PAGE 8 of 8
ACTION, CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDING ARISING UNDER OR WITH
RESPECT TO THIS GUARANTY, OR IN ANY WAY CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO THE DEALINGS OF GUARANTOR AND PBC WITH RESPECT TO THIS GUARANTY,
OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE
MAXIMUM EXTENT PERMITTED BY LAW, GUARANTOR HEREBY AGREES THAT ANY SUCH ACTION,
CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL
WITHOUT A JURY AND THAT PBC MAY FILE AN ORIGINAL COUNTERPART OF THIS SECTION
WITH ANY COURT OR OTHER TRIBUNAL AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR
TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as
of the date set forth in the first paragraph hereof.
/s/ Ronald G. Lee
---------------------------------------
Ronald G. Lee
Guarantor's Address: 1147 San Marino Avenue
San Marino, CA 91108
Telephone: (818) 792-1428
8
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