<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number: 1-7335
------
LEE PHARMACEUTICALS
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-2680312
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1444 Santa Anita Avenue,
South El Monte, California 91733
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(626) 442-3141
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
As of June 30, 1999 there were outstanding 4,135,162 shares of common
stock of the registrant.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Cash $ 4
Accounts and notes receivable (net of allowances: $233) 476
Due from related party 225
Inventories:
Raw materials $1,779
Work in process 247
Finished goods 415
------
Total inventories 2,441
Other current assets 461
-------
Total current assets 3,607
Property, plant and equipment (less
accumulated depreciation and
amortization: $6,268) 439
Goodwill and other assets (net of
accumulated amortization: $6,431) 3,743
-------
TOTAL $7,789
-------
-------
</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Bank overdraft $ 136
Note payable to bank 1,148
Notes payable, other 1,352
Current portion - royalty agreements 41
Current portion - note payable related party 465
Accounts payable 1,224
Other accrued liabilities 542
Environmental cleanup liability 365
Due to related parties 565
Deferred income 65
---------------
Total current liabilities 5,903
---------------
Long-term notes payable to related parties 2,642
---------------
Long-term notes payable, other 1,199
---------------
Long-term notes payable to bank 195
---------------
Environmental cleanup liability - Casmalia Site 374
---------------
Deferred income 27
---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $10 per value; authorized, 7,500,00 shares;
issued and outstanding, 4,135,162 shares. 413
Additional paid-in capital 4,222
Accumulated deficit (7,186)
---------------
Total stockholders' equity (2,551)
---------------
TOTAL $ 7,789
---------------
---------------
</TABLE>
See notes to financial statements.
<PAGE>
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,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenues $ 2,034 $ 2,166 $ 6,803 $ 7,017
Less: Sales returns (156) (199) (416) (556)
Cash discounts and others (25) (18) (62) (59)
------------ ------------ ------------ ------------
Net revenues 1,853 1,949 6,325 6,402
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 775 968 2,738 2,848
Selling and advertising expense 645 901 2,184 2,690
General and administrative expense 348 537 995 1,321
Interest expense 173 156 547 456
------------ ------------ ------------ ------------
Total costs and expenses 1,941 2,562 6,464 7,315
------------ ------------ ------------ ------------
Loss from operations (88) (613) (139) (913)
Other income 28 18 62 54
------------ ------------ ------------ ------------
Net loss before extraordinary item (60) (595) (77) (859)
Extraordinary loss related to Casmalia
Disposal Site Cleanup -- -- (374) --
------------ ------------ ------------ ------------
Net loss $ (60) $ (595) $ (451) $ (859)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Per share:
Net loss per share before
extraordinary loss $ (.01) $ (.14) $ (.02) $ (.20)
Extraordinary loss -- -- (.09) --
------------ ------------ ------------ ------------
Net loss $ (.01) $ (.14) $ (.11) $ (.20)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to financial statements.
<PAGE>
LEE PHARMACEUTICALS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
1999 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $ (451) $ (859)
Loss from extraordinary item............................................. 374 --
------------- -------------
Net loss before extraordinary item......................................... (77) (859)
------------- -------------
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation............................................................... 102 93
Amortization of intangables................................................ 640 701
(Decrease) in deferred income.............................................. (49) (49)
(Gain) on disposal of property, plant, and equipment....................... (13) (5)
Change in operating assets and liabilities:
Decrease in accounts receivable............................................ 418 565
(Increase ) in due from related party...................................... (167) (135)
(Increase) in inventories ................................................. (319) (148)
Decrease in other current assets........................................... 42 520
Increase (decrease) in accounts payable.................................... 166 (12)
Increase in accounts payable related party................................. 91 75
Increase (decrease) in notes payable, other................................ 687 (48)
Increase in accrued liabilities-environmental cleanup...................... 76 201
Increase in other accrued liabilities...................................... 159 254
(Decrease) in accrued royalities........................................... (363) (856)
------------- -------------
Total adjustments.......................................................... 1,470 1,156
------------- -------------
Net cash provided by operating activities................................ 1,393 297
------------- -------------
Cash flows from investing activities:
Additions to property, plant, and equipment................................ (57) (61)
Proceeds from sale of equipment............................................ 13 5
Acquisitions of product brands............................................. (1,350) (70)
Increase in long-term deposits............................................. -- (12)
------------- -------------
Net cash (used in) investing activities.................................. (1,394) (138)
------------- -------------
Cash flows from financing activities:
(Payments on) bank loans................................................... (22) (14)
(Payments on) notes payable to related party............................... (14) (4)
(Payments on) proceeds from notes payable, other........................... (51) 3
(Decrease) in long-term royalty agreements................................. -- (96)
Increase (decrease) in bank overdraft...................................... 50 (65)
------------- -------------
Net cash (used in) financing activities.................................. (37) (176)
------------- -------------
Net (decrease) in cash........................................................ (38) (17)
Cash, beginning of year....................................................... 42 26
------------- -------------
Cash end of period............................................................ $ 4 $ 9
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................... $ 461 $ 394
------------- -------------
------------- -------------
Acquisitions of product brands:
Fair value of assets acquired.............................................. $ 2,217 $ 70
Fair value of liabilities incurred......................................... (867) --
------------- -------------
Net cash payments........................................................ $ 1,350 $ 70
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL INFORMATION
1. Basis of presentation:
The accompanying balance sheet as of June 30, 1999, and the statements of
operations and cash flows for the periods ended June 30, 1999, and 1998,
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,
1999, are not necessarily indicative of results to be expected for the year
ending September 30, 1999.
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, 1998.
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, 1998. 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.
The Company accrued a $374,000 charge in the first quarter of fiscal 1999
with respect to a possible environmental cleanup liability related to the
Casmalia Disposal Site. The Company will be filing for relief from this
obligation under the financial hardships option in the EPA's response form
"Instructions for Applying for Financial Review," consequently, the
$374,000 accrual is presented as a long-term liability.
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 continue as a
going concern.
3. Net income (loss) per share:
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the periods presented. Common
stock equivalents (common stock options) are not included in these
calculations where their effect on net income 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 the bank's
reference rate plus 4%, maturing March 2001. At June 30, 1999, the interest
rate was 12%. The note is guaranteed by the former Chairman of the Company
and the Company's President.
<PAGE>
5. Line of credit:
Effective May 21, 1998, the Company renewed its accounts receivable
financing, maturing May 2000, whereby 75% of the eligible domestic accounts
receivable, not to exceed $1,100,000 less amounts loaned on inventory, not
to exceed $400,000, can be advanced. The agreement may be renewable for
successive one year periods thereafter. Also, the agreement requires
minimum monthly interest of $3,000 with an interest rate of 5% above Bank
of America's prime rate. The new financing agreement includes a $400,000
term loan on inventory which is incorporated in the working capital line of
credit above. The term loan requires monthly payments of $11,110 with an
interest rate of 6% above Bank of America's prime rate. Additionally, there
is a separate $440,000 term loan on the Company's equipment. The financing
is secured by a security interest in all of the Company's assets and
requires monthly payments of $11,800 including interest at Bank of
America's prime rate plus 6%.
6. Acquisition:
On February 17, 1998, the Company purchased certain assets of the
PAIN-A-LAY -Registered Trademark- throat spray line from Medtech
Laboratories, 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.
On September 28, 1998, the Company purchased certain assets of the
EVAC-U-GEN-Registered Trademark- brand of laxatives from Walker, Corp. &
Co., Inc. for $234,000. The Company remitted $100,000 at closing and is
required to make monthly payments of $5,300, plus interest, beginning
November 25, 1998 and ending September 25, 2001. This note is personally
guaranteed by the Company's Chairman. The interest rate is equal to the
highest prime rate during any one period. In addition, the Company
purchased certain inventories from Walker, Corp. & Co., Inc. for $54,500 at
closing.
On October 1, 1998, the Company purchased certain assets of the
Cheracol-Registered Trademark- cough syrup, Comhist-Registered Trademark-
decongestant tablets and Entuss-Registered Trademark- expectorant product
lines from Roberts Pharmaceutical Corporation for $684,934. The Company
remitted $600,000 at closing and is required to make monthly payments of
$3,538, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. In addition, the Company purchased certain inventory for
$150,800 for which the Company is required to make monthly payments of
$6,283, plus interest at prime, commencing January 1, 1999, and ending
November 1, 2000. By mutual consent, the buyer and seller, in March, 1999
reduced the purchase price to $666,863 and the monthly payments were
adjusted from $3,538 to $2,786. The maturity date is unchanged.
On December 1, 1998, the Company purchased certain assets of seven
over-the-counter products from Numark Laboratories, Inc. for $430,000 of
which $100,000 was inventory. The Company remitted the full $430,000 at
closing.
On April 23, 1999, the Company purchased certain assets of the Lady
Esther-Registered Trademark-, facial cream and powder product line from
Numark Laboratories, Inc. for $220,000. The Company remitted $220,000 at
closing. In addition, the Company purchased certain inventory for $169,000.
On June 29, 1999, the Company purchased certain assets of the
Take-Off-Registered Trademark-, pre-moistened makeup remover cloths product
line from Premier Consumer Products, Inc. and Advanced Polymer Systems,
Inc. for $1,000,000. The Company remitted $200,000 at closing and is
required to make monthly payments of $32,000 plus interest at prime
commencing September 15, 1999 and ending September 15, 2001. In addition,
the Company purchased certain inventory for approximately $70,000.
7. Non-cash transaction:
In March 1999 a non-cash transaction was recorded whereby $193,000 in prior
cash advances, to a related party, was offset against a long-term note, of
the same amount, due to the same related party.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999,
AND JUNE 30, 1998
Gross revenues for the three months ended June 30, 1999, were $2,034,000, a
decrease of approximately $132,000 or 6% from the comparable three months
ended June 30, 1998. The decrease in gross revenues was due to the reduced
sales revenues of the nail category products, WATE-ON-Registered Trademark-
and Lee-Registered Trademark- Lip-Ex-TM-. The decrease in sales revenues
was partially offset by volume generated from recently acquired brands such
as EVAC-U-GEN-Registered Trademark-, Cheracol-Registered Trademark-,
Comhist-Registered Trademark-, and Entuss-Registered Trademark- plus seven
new over-the-counter items purchased from Numark Laboratories. The newly
acquired brands accounted for approximately $290,000 of gross revenues.
Net revenues decreased approximately $96,000 or 5% for the three months
ended June 30, 1999, as compared to the three months ended June 30, 1998.
The change in net revenues was due to the same explanations discussed
above. The Company's sales returns decreased approximately $43,000 or 22%
when comparing fiscal years 1999 and 1998, due mainly to lower returns of
the depilatory category and nail extender products.
Cost of sales as a percentage of gross revenues was 38% for the three
months ended June 30, 1999, compared to 45% for the three months ended June
30, 1998. The lower cost of sales percentage was due to the change in
product mix and fewer temporary personnel utilized in the
production/assembly process. The Company has also benefited from the
economy of longer production runs.
Selling and advertising expenses decreased $256,000 or 28% when comparing
the three months ended June 30, 1999, with the three months ended June 30,
1998. The decrease in expenses was mainly due to the following factors; 1)
finalization of a minimum royalty due ($125,000 per quarter) on a brand
acquisition which ended on September 30, 1998, 2) lower commissions
($28,000) due to fewer sales representatives and lower commission rates, 3)
reduced salary and related fringe benefits plus associated travel and
entertainment expenses because of one less outside salesman ($68,000), 4)
the finalization of royalty due on several other brand acquisitions
($12,000) and 5) less media-print advertising expense ($8,000). The above
major decreases were somewhat offset by increases in; 1) amortization
expense ($23,000) the result of recent brand acquisitions and 2) products
liability insurance ($4,000) due to an increase in coverage limits.
General and administrative expenses decreased $189,000 or 35% when
comparing the three months ended June 30, 1999, with the three months ended
June 30, 1998. The decrease in expenses was mainly due to the following
factors; 1) lower salaries and wages plus related fringe benefits the
result of fewer personnel ($32,000), 2) reduced legal expenses ($21,000),
3) a reduction in consulting services expense ($23,000), 4) no comparative
audit loan fee regarding possible outside financing ($12,500), and 5) one
time accrual for the Monterey Park waste site cleanup ($79,000) plus an
additional environmental cleanup accrual of $122,000. The above significant
decreases were partially offset by an increase in management information
systems (MIS) consulting services ($25,000) related to Year 2000 readiness.
Interest expense increased $17,000 or 11% when comparing the three months
ended June 30, 1999, with the three months ended June 30, 1998. The
increase was due to increased borrowings from the Company's asset based
financing lender. This was somewhat offset by lower private borrowings and
a decrease in the prime rate, 7.75% versus 8.5% at June 30, 1999 and June
30, 1998, respectively related to certain borrowings which are tied to
prime.
MATERIAL CHANGES IN RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 1999,
AND JUNE 30, 1998
Gross revenues for the nine months ended June 30, 1999, were $6,803,000 a
decrease of approximately $214,000 or 3% from the comparable nine months
ended June 30, 1998. The decease in gross revenues was due to the decline
in volume generated from depilatories, Aquafilter-Registered Trademark-,
Lee-Registered Trademark- Lip-Ex-TM- and the nail extender category of
products. The decreased sales volume was partially offset by the sales
revenues generated from the newly acquired brands such as
EVAC-U-GEN-Registered Trademark-, Cheracol-Registered Trademark-,
Comhist-Registered Trademark-, and Entuss-Registered Trademark- plus seven
new over-the-counter items purchased from Numark Laboratories.
<PAGE>
Net revenues for the nine months ended June 30, 1999 were $6,325,000 a
decrease of $77,000 or 1% from the comparable nine months ended June 30,
1998. The sales returns were lower ($140,000 or 25%) during the nine months
period ended June 30, 1999, versus June 30, 1998. This was the result of
lower returns of the nail extender products, depilatory category and
several over-the-counter brands.
Cost of sales as a percentage of gross revenues for the nine months ended
June 30, 1999, as compared to the nine months ended June 30, 1998, was 40%
versus 41% respectively. The lower cost of sales percentage for the nine
months ended June 30, 1999, compared to June 30, 1998 was due to a
favorable product mix and the economy of longer production runs.
Selling and advertising expenses decreased $506,000 or 19% when comparing
the nine months ended June 30, 1999, with the nine months ended June 30,
1998. The decreased expenses were basically due to; 1) finalization of a
minimum royalty due ($375,000 for nine months) on a brand acquisition which
ended September 30, 1998, 2) lower commissions ($94,000) due to fewer
manufacturer representatives and lower commission rates, 3) the
finalization of royalty due on several other brand acquisitions ($28,000),
and 4) reduced salary and related fringe benefits plus associated travel
and entertainment expenses because of one less salesman ($32,000). The
above major decreases were partially offset by increases in; 1)
amortization expense ($56,000) the result of recent brand acquisitions, and
2) products liability insurance ($41,000) due to an increase in coverage
limits.
General and administrative expenses decreased $326,000 or 25% when
comparing the nine months ended June 30, 1999, with the nine months ended
June 30, 1998. The decrease was principally due to the same factors as
listed when comparing the three months ended June 30, 1999, versus the
comparable period ended June 30, 1998.
Interest expense increased $77,000 or 16% when comparing the nine months
ended June 30, 1999, with the nine months ended June 30, 1998. The increase
was due to increased borrowings from the Company's asset based financing
lender. This was somewhat offset by a decrease in the prime rate, 7.75%
versus 8.5% at June 30, 1999 and June 30, 1998, respectively related to
certain private borrowings which are tied to prime.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, working capital was a negative $2,296,000 compared with a
negative $719,000 as of September 30, 1998. The ratio of current assets to
current liabilities was .6 to 1 at June 30, 1999, and .8 to 1 at September
30, 1998. The increase in the Company's negative working capital was
primarily due to an increase in current liabilities of $1,372,000
(basically an increase in the current portion of notes payable as a result
of newly acquired product brands, an increase in the current portion of
notes payable as a result of private borrowings and an increase in the
environmental cleanup liability) and a decrease in current assets of
$205,000 primarily due to a decrease in accounts receivable and other
current assets.
The Company has an accumulated deficit of $7,186,000. The Company's past
recurring losses and the second quarter 1999's profit and fiscal 1997's
nominal profit 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.
YEAR 2000 READINESS
Most companies have computer systems that use two digits to identify a year
in the date field (e.g. "98" for 1998). These systems must be modified to
handle turn-of-the century calculations. If not corrected, systems failures
or miscalculations could occur, potentially causing disruptions of
operations, including, among other things, the inability to process
transactions, send invoices, or engage in other normal business activities.
This creates potential risk for all companies, even if their own computer
systems are Year 2000 compliant.
<PAGE>
In 1998, the Company initiated a comprehensive review of its computer
systems to identify processes that could be adversely affected by Year 2000
issues. In addition, the Company identified computer application systems
that required modification or replacement.
The Company will be required to modify or replace certain portions of its
software so that its systems will function properly with respect to dates
in the Year 2000 and thereafter. The Company has upgraded its existing
computer system hardware and software and has solicited the assistance of a
software reengineering company specializing in services to resolve the Year
2000 problem to remediate non-compliant code in existing applications and
systems. The Company is also utilizing internal resources to reprogram or
replace and test the software for Year 2000 modifications.
The Company has an ongoing program of communicating with suppliers and
vendors to determine the extent to which those companies are addressing
Year 2000 compliance issues. There can be no assurance that the Company
will be able to develop a contingency plan that will adequately address
issues that may arise in the Year 2000.
In 1999, a contingency plan will be developed in the event key or critical
suppliers or vendors are unable to meet the Year 2000 compliance. If
needed, such steps as identifying alternative suppliers and vendors will be
addressed. The timeframe for completing or documenting contingency plans
has not been finalized.
The Company estimates that the cost of remediation will be less than
$100,000. The remediation costs include internal labor costs, as well as
fees and expenses paid to outside contractors specifically associated with
programming and purchased hardware and upgraded software.
The Company's Year 2000 plans, including costs, preparation for testing,
and completion schedules (by October 1999), are based on management's best
estimates. These estimates were derived using assumptions of future events
including third party input, availability of qualified personnel, and other
factors.
Based on currently available information, management does not believe that
the Year 2000 matters discussed above will have a material adverse impact
on the Company's financial condition or results of operations; however,
because of the uncertainties in this area, no assurances can be given in
this regard.
ENVIRONMENTAL MATTERS
The Company owns a manufacturing facility located in South El Monte,
California. The California Regional Water Quality Control Board (The
"RWQCB") ordered the Company in 1988 and 1989 to investigate the
contamination on its property (relating to soil and groundwater
contamination). The Company engaged a consultant who performed tests and
reported to the then Chairman of the Company. The Company resisted further
work on its property until the property upgradient was tested in greater
detail since two "apparent source" lots had not been tested. On August 12,
1991, the RWQCB issued a "Cleanup and Abatement Order" directing the
Company to conduct further testing and cleanup the site. In October 1991,
the Company received from an environmental consulting firm an estimate of
$465,200 for investigation and cleanup costs. The Company believed that
this estimate was inconclusive and overstated the contamination levels. The
Company believes that subsequent investigations will support the Company's
conclusions about that estimate. The Company did not complete the testing
for the reasons listed above as well as "financial constraints". In June
1992 the RWQCB requested that the EPA evaluate the contamination and take
appropriate action. At the EPA's request, Ecology & Environment, Inc.
conducted an investigation of soil and groundwater on the Company's
property. Ecology & Environment Inc.'s Final Site Assessment Report, which
was submitted to the EPA in June 1994, did not rule out the possibility
that some of the contamination originated on-site, and resulted from either
past or current operations on the property. The Company may be liable for
all or part of the costs of remediating the contamination on its property.
The EPA has not taken any further action in this matter, but may do so in
the future.
The Company and nearby property owners, in consort with their comprehensive
general liability (CGL) carriers, have engaged a consultant to perform a
site investigation with respect to soil and shallow groundwater
contamination over the entire city block. The CGL carriers provided
$290,000 in funding which paid for the $220,000 study, $20,000 in legal
fees for project oversight, and a $50,000 balance in the operating fund.
Earlier the Company had accrued $87,500 as its proportionate share of the
earlier quote of $175,000. Since that time, the overall scope of the
project was increased to
<PAGE>
$205,000 plus $15,000 for waste water disposal, bringing the total to the
above listed $220,000. The $87,500 accrual was not spent on this project
(as the entire cost was borne by the CGL carriers), but remains on the
books as an accrual against the cost of remediation of the same site that
was included in the study.
The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination
on the properties leased by the tenants. The case name is DEL RAY
INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los Angeles County
Superior Court, Northwest District, commenced August 21, 1991. In this
action, the plaintiff alleges environmental contamination by defendants of
its property, and seeks a court order preventing further contamination and
monetary damages. The Company does not believe there is any basis for the
allegations and is vigorously defending the lawsuit.
The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater which is part of
the San Gabriel Valley Superfund site. The Company has been notified that
it is a potentially responsible party ("PRP") for the contamination. In
1995, the Company was informed that the EPA estimated the cleanup costs for
the South El Monte's portion of the San Gabriel Valley Superfund site to be
$30 million. The Company's potential share of such amount has not been
determined. Superfund PRPs are jointly and severally liable for superfund
site costs, and are responsible for negotiating among themselves the
allocation of the costs based on, among other things, the outcome of
environmental investigation.
In August 1995 the Company was informed that the EPA entered into an
Administrative Order of Consent with Cardinal Industrial Finishes
("Cardinal") for a PRP lead remedial investigation and feasibility study
(the "Study") which, the EPA states, will both characterize the extent of
groundwater contamination in South El Monte and analyze alternatives to
control the spread of contamination. The Company and others have entered
into the South El Monte Operable Unit Site Participation Agreement with
Cardinal pursuant to which, among other things, Cardinal will contract with
an environmental firm to conduct the Study. The Study has been completed
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 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
<PAGE>
"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 in the third quarter of
fiscal 1998).
Without any prior correspondence or inkling of the Company's potential
liability, the EPA has recently informed the Company that the Company may
have potential liability for the ongoing remediation of Operating
Industries, Inc. (as they have gone out of business) Landfill Superfund
Site in Monterey Park, California (the "Monterey Site"). The Monterey Site
is a 190 acre landfill that operated from 1948 to 1984, in which the
Company disposed of non toxic pH balanced waste water on six occasions
between 1974 and 1978. Over 4,000 companies have been identified as having
contributed waste to the Monterey Site. The EPA has offered to settle the
Company's potential liability with respect to the Monterey Site for a cost
to the Company of $79,233. The Company accrued a $79,000 charge in the
third quarter of fiscal 1998 with respect to this possible liability. The
Company has elected to file for relief from these obligations under the
financial hardship option in the EPA's response form.
The Company was recently notified by the EPA that the Company may have
potential liability for waste material it disposed of at the Casmalia
Disposal Site ("Site") located on a 252-acre parcel in Santa Barbara
County, California. The Site was operational from 1973 to 1989 and over
10,000 separate parties disposed of waste there. The EPA stated that
federal, state and local governmental agencies along with the numerous
private entities that used the Site for waste disposal will be expected to
pay their share as part of this settlement. The U.S. EPA is also pursuing
the owner(s)/operator(s) of the Site to pay for Site remediation. The EPA
has a settlement offer to the Company with respect to the Site for a cost
of $373,950. The Company accrued a $374,000 charge in the first quarter of
fiscal 1999 with respect to this possible liability. The Company has
elected to file for relief from these obligations under the financial
hardships option in the EPA's response form "Instructions for Applying for
Financial Review."
The total amount of environmental investigation and cleanup costs that the
Company may incur with respect to the foregoing is not known at this time.
However, based upon information available to the Company at this time, the
Company has expensed since 1988 a total of $860,000, of which $89,000 were
legal fees, exclusive of legal fees expended in connection with the SEC
environmental investigation. The actual costs could differ materially from
the amounts expensed for environmental investigation and cleanup costs to
date.
<PAGE>
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, 1998.
Item 6. Exhibits
3.1 - Articles of Incorporation, as amended (1)
3.4 - By-laws, as amended December 20, 1997 (2)
3.5 - Amendment of By-laws effective March 14, 1978 (2)
3.6 - Amendment to By-laws effective November 1, 1980 (3)
10.1 - Asset Purchase and Sale Agreement dated June 29, 1999,
between Lee Pharmaceuticals (Buyer) and Premier Consumer
Products, Inc. (Seller) and Advanced Polymer Systems,
Inc., regarding a brand acquisition
10.2 - Promissory note evidencing advance made to the Registrant
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>
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 9, 1999 RONALD G. LEE
-------------- ------------------------------------
Ronald G. Lee
Chairman of the Board, President and
Chief Financial and Accounting Officer
<PAGE>
EXHIBIT 10.1
ASSET PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is made as of this 29th day of June 1999, by and between
LEE PHARMACEUTICALS, INC., a corporation organized and existing under the
laws of the State of California ("Buyer") and PREMIER CONSUMER PRODUCTS,
INC., a corporation organized and existing under the laws of the State of
Delaware ("Seller"), and ADVANCED POLYMER SYSTEMS, INC., a corporation
organized and existing under the law of the State of Delaware ("APS").
1. SALE AND TRANSFER OF ASSETS. Seller agrees that it will sell,
transfer, convey and deliver to Buyer at the closing provided for in Section
3 hereof (the "Closing") certain of the assets of Seller as more specifically
defined in Section 2 hereof (the "Assets").
2. ASSETS OF SELLER. The Assets shall consist of the following:
(a) All rights, title and interest, including the goodwill
associated therewith, in the Take-Off product line (the "Product") in the
Territory (as hereinafter defined), including any and all agreements (whether
purchase, royalty, or license) (the "Ownership Agreements") relating to the
ownership of the Product, and all "Intangibles" (as defined in Section 8(g)
hereof), related to the Product.
(b) The existing purchase orders for inventory, supplier and
contract manufacturing agreements, written sales representatives and
distributorship agreements, and customer agreements or arrangements of the
Seller relating to the Product (the "Contracts"), all as set forth in Exhibit
A annexed hereto. Exhibit A sets forth all agreements and arrangements with
customers, suppliers, sales representatives or distributors, whether oral or
written, concerning the Product, including commissions, promotional
allowances, rebates, return policies, quantity discounts and the like. All
contracts set forth on Exhibit A hereto can be transferred and assigned by
Seller to Buyer without obtaining the consent of any person or if the
consent, of any person is required, such consent has been obtained as set
forth on Exhibit A hereto.
(c) Copies of customer, supplier, sales representative and
distributor lists, advertisements and ad sheets and records of Seller which
Buyer reasonably determines, prior to Closing, it needs to carry on the
business currently being conducted by Seller with respect to the Assets.
(d) Any and all tools, dies, jig molds and other tangible personal
property needed or used to manufacture the Products as set forth on Exhibit B
hereto.
(e) The Inventory of Seller related to the Product (as defined at
Section 8(i) hereof).
1
<PAGE>
3. AGREEMENT OF APS. APS agrees and consents to the sale of the Assets
by Seller to Buyer.
4. CLOSING. The Closing of the transaction provided for in Section 1
shall take place at the office of Buyer's counsel, Skadden, Arps, Slate,
Meagher & Flom LLP, 300 South Grand Ave., Los Angeles, California 90071,
simultaneously with the execution hereof; however, to the extent feasible,
the Closing will be accomplished by facsimile signature and overnight courier
services. When the transaction provided for in Section 1 is closed pursuant
to this Agreement, the purchase of the Assets shall be effective as of June
30, 1999. Any orders unfilled as of 12:01 am PDT on June 29, 1999, or
received after such time and date, shall be filled by Seller for the account
of Buyer. Any orders received by Seller after 12:01 am PDT on July 1, 1999
shall be forwarded to Buyer. The net profit (gross shipments at normal and
customary prices) for orders filled by Seller for the account of Buyer less
five percent (5%.) for services provided pursuant to Section 14(e) hereof,
less a two percent (2%) cash discount, less the cost of shipping and less the
cost of the inventory at standard costs shall be remitted to Buyer as soon as
practicable after July 1, 1999, subject to collection of receivables under
normal payment terms.
5. PAYMENT BY BUYER. Subject to the provisions of Section 16 hereof,
Buyer shall pay the sum of One Million Dollars for the Product goodwill and,
in addition, shall pay the book value of all good, saleable Product Inventory
including finished goods, raw materials and work in progress as follows:
(a) In respect of Product goodwill:
(i) Two Hundred Thousand Dollars ($200,000) shall be paid on
the closing, one-half to Seller and one-half to APS.
(ii) Twenty-five (25) monthly payments of Twelve Thousand
($12,000) to Seller and Twenty Thousand ($20,000) to APS beginning
September 15, 1999.
(b) In respect of Product Inventory:
(i) Twenty five thousand ($25,000) shall be paid on the
closing to Seller
(ii) An amount to Seller equal to the book value of all good
and saleable Product inventory which does not represent more than twelve (12)
months historic supply per SKU in accordance with the provisions of Section 16
or such other amount as Buyer and Seller shall mutually agree to be the proper
payment for the inventory in accordance with the provisions of this
Agreement within ten days of receipt of the inventory by Buyer, less the sum
paid in 5b(i).
(c) Any unpaid balance due shall be due and payable on September
15, 2001; interest shall accrue on all of the unpaid outstanding balance of the
purchase price and shall be paid monthly commencing September 15, 1999, at a
rate equal to the
2
<PAGE>
highest prime rate published in the Wall Street Journal during the month
preceding the month in which the interest, payment is due and continuing
until the entire outstanding amount of the purchase price shall have been paid
in full. In no case, however, shall the interest rate be higher than that rate
permitted by applicable law.
Any and all payments due Seller and APS hereunder (except for the Inventory)
which are not paid in full on the Closing shall be evidenced by a Promissory
Note payable to Seller for Three Hundred Thousand ($300,000) and a Promissory
Note payable to APS for Five Hundred Thousand Dollars ($500,000) each and
a separate Promissory Note payable to Seller only for the Inventory
substantially in the form of Annex III attached hereto (the "Promissory
Notes"). The Promissory Notes shall be secured by the grant of a security
interest in the intangibles in accordance with and pursuant to a Security
Agreement substantially in the form of Annex IV attached hereto.
6. LIMITED LIABILITIES BEING ASSUMED: ACCOUNTS RECEIVABLE.
(a) On the Closing, Buyer shall assume the following liabilities,
and only the following liabilities of Seller and no other liabilities of
Seller:
(i) The Contracts provided for in Section 2(b) hereof.
(b) With respect to the liabilities assumed pursuant to Section
6(a)(i) hereof, Buyer shall assume only those contractual liabilities,
obligations and commitments which arise after and mature after the Closing
and those contractual liabilities, obligations and commitments which arise
before the Closing but mature after the Closing as are specifically provided
for herein, and Seller shall be responsible for any liabilities, obligations
and commitments which arise on or before or mature on or before the Closing
or which arise before the Closing but mature after the Closing (except those
specifically assumed herein by Buyer). The agreements set forth in Section
6(a)(i) hereof shall be transferred by Seller to Buyer on Closing.
(c) Other than as set forth in this Section 6, Buyer is not
assuming any liabilities, obligations or commitments, whether matured or not,
contingent or not or fixed or not of Seller. Among those liabilities not being
assumed are those relating to (i) obligations owed or incurred to employees
or independent contractors for wages, salaries, bonuses, commissions,
termination pay, vacation or leave pay, withholding amounts or withholding
taxes, employee benefits, workers compensation, employee insurance, employee
contracts, collective bargaining agreements, or amounts due pursuant to
pensions, profit sharing, stock options, stock purchase, health, dental or
welfare, or any other type of employee benefit plan, including, but without
limitation, any withdrawal liability provided for in the Employee Income
Retirement Security Act of 1974, as amended, (ii) sales, use, employee,
income, franchise or any other types of taxes, (iii) any litigation, torts,
environmental claims, employee or independent contractor claims, breaches of
contract (including wrongful termination) and violations of law, whether
relating to the operation of the business of Seller or not, and (iv) any
amounts owed to customers, suppliers, subcontractors, sales representatives or
3
<PAGE>
distributors. Buyer, in making this Agreement, is not now nor will it become
a successor in interest to Seller with respect to any collective bargaining
agreement Seller may have in effect. The above list is not intended to be an
exhaustive list of liabilities not being assumed.
(d) After the Closing, Seller shall hold harmless and
indemnify Buyer against any liabilities of Seller not being assumed by Buyer
pursuant to Section 6(a) hereof and any and all claims against Seller. After
the Closing, Buyer shall hold harmless and indemnify Seller against any
liability assumed by Buyer hereunder.
(e) Seller shall be responsible for collecting any of its
accounts receivable that remain outstanding as of the Closing for the
Products. If Buyer receives any payments for said accounts receivable owed to
Seller, Buyer shall promptly remit such payments to Seller. Payments made by
customers shall be credited to the oldest outstanding invoice unless
otherwise specified by the customer. Seller will be responsible for settling
and paying customers any amounts of the Products returned to Buyer or for
which the Seller or Buyer receives notice from the customer that the Products
are to be returned, provided that such returns or notice occurs in the
six-month period after the Closing; provided, further, if a customer deducts
any amounts from Buyer which Seller is responsible for under the provision of
this Agreement, Buyer may deduct such amounts from any payments due to
Seller by Buyer. Buyer shall not encourage any customer to return any
Products shipped by Seller.
(f) Seller shall be responsible for any product liability
claims (i) arising from an occurrence or sale of any of such Products taking
place prior to the Closing or (ii) arising out of the manufacture of a
Product by or for Seller, provided such claim does not arise out of the
negligence of Buyer. Buyer shall name Seller as additional insured on Buyer's
product liability policy through December 31, 2000. Buyer shall provide
Seller with such certificates of insurance, or other evidence, as Seller may
reasonably request from time to time to verify such product liability
insurance coverage. Buyer shall designate Seller as an additional insured on
such policy and shall maintain such insurance at Buyer's sole cost and
expense and at levels of coverage customarily maintained by Buyer.
(g) Seller shall pay for all co-op advertising or promotional
activities, including redemption of coupons that can be specifically
identified as being issued prior to the Closing, for all advertising runs,
and for any other marketing expenses incurred prior to the Closing,
regardless of when the claim is presented relating to the Products. Seller
shall forward to Buyer invoices for advertising or promotions scheduled to
run after Closing, and Buyer shall make the payments therefor; provided,
however, to the best of Seller's Knowledge (as Defined in Section 9 hereof),
the advertising and promotional activities scheduled to run after Closing,
including outstanding coupons, and the expenses therefor are set forth on
Exhibit C hereto. Advertising and promotional obligations which are not set
forth on Exhibit C that benefit Buyer (and the Products) not exceeding Two
Thousand Five Hundred Dollars ($2,500), individually and
4
<PAGE>
up to Ten Thousand Dollars ($10,000) in the aggregate shall be paid by Buyer
and any excess amounts shall be paid promptly by Seller.
(h) After closing, Seller shall promptly notify Buyer by
telephone and send to Buyer by mail copies of all wholesale orders from the
trade (vs. retail/mail orders) that it receives for the Products. Seller
shall promptly fax to Buyer a receiving report for all returns Seller
receives after the Closing Date.
7. INSTRUMENTS OF CONVEYANCE AND TRANSFER. At the Closing, Seller agrees
to deliver to Buyer and to APS as appropriate, a Bill of Sale in the form of
Annex I hereto for the Assets and an assignment of all Ownership Agreements
and Contracts which Seller has on hand at the date of Closing and all evidence
of ownership of Intangibles and executed Promissory Notes in the form of
Annex IV, executed Security Agreement in the form of Annex IV and executed
UCC-1 form suitable for filing with the California Secretary of State. Seller
shall execute such other instruments prepared by Buyer as Buyer may from time
to time reasonably request to evidence Buyer's title to the Assets,
including the Intangibles and rights to Ownership Agreements and Contracts.
Seller shall deliver to Buyer at the Closing, all Ownership Agreements,
Contracts and the Intangibles on hand.
8. USE OF NAME. On and after the Closing, Seller shall cease to use the
name of the Product and all similar names in any country of the world where
Seller is using such names or has the right to use such names (the
"Territory"). The Territory for the Product is set forth in Exhibit I hereto.
Seller shall execute an Assignment of such names substantially in the form of
Annex II hereto.
9. REPRESENTATIONS AND WARRANTIES BY SELLER. Seller hereby represents
and warrants, subject as appropriate to the consent of APS to provisions of
their Agreement that:
(a) All corporate action by Seller and its Board of Directors
to authorize the execution, delivery and performance of this Agreement by
Seller have been duly taken.
(b) To Seller's Knowledge, the execution and delivery by the
Seller of this Agreement and the performance by the Seller of this Agreement
and the consummation of the transactions herein contemplated will not
conflict with, or result in a breach of the terms of, or constitute a default
under or violation of, any law or regulation of any governmental authority,
domestic or foreign, or the Articles of Incorporation or By-Laws of Seller or
any material agreement or instrument to which Seller is a party or by which
Seller is bound or to which it is subject; nor will it give to others any
interests or rights, including rights of termination, acceleration or
cancellation, in or with respect to any-of the properties, assets,
agreements, contracts or business of Seller. To Seller's Knowledge, other
than as set forth in Exhibit D hereto, no consent of any governmental
authority is required to be obtained on the part of the Seller to permit the
transactions contemplated by this Agreement.
5
<PAGE>
(c) Other than as set forth in Exhibit D hereto, Seller has
good and marketable title to all the Assets in each case subject to no
security interest, lien, pledge, restriction, charge or encumbrance all of
which will by paid at Closing. To Seller's Knowledge, none of the Assets nor
the operation or maintenance thereof, contravenes any administrative
regulation or any provision of law in such a way as to materially and
adversely affect the business or properties of Seller or involves any
hazardous materials or waste.
(d) Seller is not in default under any Ownership Agreement or
Contract and there have been no claims or defaults and there are no existing
facts or conditions to Seller's Knowledge which, if continued or on notice,
will result in any claims or defaults under any Ownership Agreement or
Contracts.
(e) The tangible personal property included in the Assets
(except inventory) is in good and useable condition and has been properly
maintained.
(f) To Seller's Knowledge, the execution, delivery and
performance by Seller of this Agreement, and the consummation of the
transactions herein contemplated, will not conflict with or result in the
breach or violation of, any judgment, order, writ, injunction or decree of
any court or governmental department, commission, board, bureau, agency, or
instrumentality, domestic or foreign, and Seller is not in default with
respect to any such judgment, order, writ, injunction or decree. Other than
as set forth on Exhibit D and the Knowledge of Seller, no governmental agency
has at any time challenged or questioned the legal right or proposed any
restriction on the legal right of the Seller to produce, manufacture, offer
or sell the product, in the present manner or style thereof.
(g) Exhibit E correctly sets forth a list of all Ownership
Agreements, and all patents, patent applications, copyrights, copyright
registrations and applications, trademarks, trademark registrations and
applications, trade names or commercial names, and any other intangible
assets (except for computer programs, industrial models, process and design,
trade secrets and know-how to manufacture the Products), in the Territory for
each Product currently owned, licensed, possessed, used or held by Seller
(collectively, the "Listed Intangibles"). As of the Closing, Seller will
transfer to the Buyer all computer programs industrial models, process and
designs, trade secrets and know-how which are dedicated exclusively to the
manufacture of the Product as they manufactured (the "Manufacturing
Intangibles") and the Listed Intangibles. Other than as set forth in Exhibit E
hereto, Seller owns the entire right, title and interest in and to the Listed
Intangibles and the Manufacturing Intangibles (collectively the
"Intangibles"), and there are no licenses, sublicenses or grants (including to
any contractors who manufacture any of the Products) relation to the use of
any of the same except as set forth on Exhibit E" hereto and none of them so
owned are to the Knowledge of Seller being infringed by any third party or
subject to a pending lawsuit or proceeding alleging any infringement or the
rights of third parties. The Seller owns all right, title and interest in all
Intangibles necessary for the manufacture of the
6
<PAGE>
Product in the Territory, including but not limited to all formulas and
know-how. To Seller's Knowledge, the conduct of the business of Seller
relating to the Assets does not infringe any patent, patent rights,
copyright, trademark, trade secret, trade right, trade name, commercial name,
trade secret or other intangible assets. On the Closing, all Intangibles
shall be transferred and disclosed to Buyer by Seller including those in the
possession of manufacturing contractors.
(h) The Seller is not obligated, absolutely or contingently,
to any person for a finder's fee, brokerage commission, or other similar
payment in connection with the transactions contemplated by this Agreement,
and the Seller agrees to indemnify and hold the Buyer harmless from any such
payments or claims for such payments made or threatened.
(i) Buyer, subject to section 16 hereof shall purchase from
Seller that inventory of the Product set forth on Exhibit F to be agreed upon
between the parties at those prices to be set forth on such Exhibit F. A
physical count of such inventory shall be taken on or about June 30, 1999.
The inventory of Seller on June 30, 1999 (the "Inventory") will consist of
items of quality which would have been usable or saleable in the ordinary
course of business of Seller if Seller had remained in the business of
selling the Inventory. All of the items included in the inventory (including
the Inventory) on the dates of an inventory are or will be the property of
Seller. Inventory items shall include finished goods and work in process, raw
materials, labels, display materials, bottles, bottling caps, packaging,
shipping cartons and stickers and other supplies and components necessary to
manufacture the Product as well as packaging materials and finished Product.
The foregoing warranties and those set forth in Section
9 and Section 16 hereof are the sole and exclusive warranties offered by
Seller regarding any of the Inventory purchased hereunder. All other
warranties, including, but not limited to, any implied warranty of
merchantability and fitness are disclaimed.
(j) Set forth on Exhibit G annexed hereto is a list of all
licenses, permits or other authorizations held by the Seller from Federal,
state or local authorities (except local business licensees), including the
Food and Drug Administration, and to Seller's knowledge, such licenses,
permits or other authorizations are the only ones required by Seller to offer
the Products, and to operate Seller's facilities (or any manufacturing
contractor's facilities) relating to the Products as currently conducted by
Seller (and such contractors).
(k) Seller will pay all of its own expenses whether or not
the transactions contemplated hereto are consummated. Seller will pay all
income, franchise, payroll, sales and all other taxes arising out of Seller's
operations prior to and subsequent to Closing. Each party shall be
responsible for any taxes imposed on it as a result of the transactions
contemplated herein.
7
<PAGE>
(l) For the calendar years 1997 and 1998 and for the five
months ended May 31, 1999, (i) Exhibit J hereto sets forth the sales, costs
of sales and returns for each of the Product sold by Seller, (ii) Exhibit I
hereto sets forth the top twenty customers for each period and returns for
each period in excess of $1,000 for the Product by each such customers; and
(iii) Exhibit K sets forth any and all product liability claims for the
Product to the Knowledge of Seller. Within 15 days after the Closing Date,
Seller will deliver to Buyer a complete list of all sales of the Product
beginning after May 31, 1999 to the Closing Date and all such sales will be
made in the ordinary course of business, consistent with past practices
without any special discounts, promotional activities or sales to diverters.
To Seller's Knowledge, no customer set forth on Exhibit I hereto has
indicated an intent to stop purchasing the Product or to materially alter its
purchases of the Product.
(m) To Seller's Knowledge, no representation, warranty or
agreement made by the Seller in this Agreement or made or to be made in the
Exhibits hereto and no statement made or to be made in any such Exhibit,
list, certificate or schedule or other instrument furnished by Seller as
required by this Agreement contains, or will contain when delivered, any
untrue statement of a material fact or omits or will omit to state when
delivered any material fact necessary to make any statement, representation,
warranty or agreement not misleading to a prospective purchase of the
Products. To Seller's Knowledge, all material facts or conditions adversely
affecting the value of the Products or the business operations of Seller
relating directly to the Assets have been disclosed to Buyer.
10. DEFINITIONS OF KNOWLEDGE. References herein to "Seller's
Knowledge" or "to the knowledge of Seller" or similar references shall mean
information actually known or which should validly have been known by an
officer of the Seller without special inquiry or investigation.
11. REPRESENTATION AND WARRANTIES BY APS.
(a) APS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all the
requisite power and authority to own its properties as currently owned and to
carry on its business as now conducted.
(b) APS' Board of Directors, if necessary, has authorized
the execution, delivery and performance of this Agreement.
(c) This Agreement constitutes a legal, valid and binding
obligation of APS enforceable against it in accordance with its terms.
(d) APS is not obligated, absolutely or contingently, to any
person for a finder's fee, brokerage commission, or other similar payment in
connection with the transactions contemplated by this Agreement, and Buyer
agrees to indemnify and hold Seller harmless from any such claims for such
payments made or threatened.
8
<PAGE>
(e) APS will pay all of its own expenses whether or not the
transactions contemplated hereby are consummated.
12. REPRESENTATIONS AND WARRANTIES BY BUYER.
(a) Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of California and has all
the requisite power and authority to own its properties as currently owned
and to carry on its business as now conducted.
(b) Buyer's Board of Directors, if necessary, has authorized
the execution, delivery and performance of this Agreement.
(c) This Agreement constitutes a legal, valid and binding
obligation of Buyer enforceable against it in accordance with its terms.
(d) Buyer is not obligated, absolutely or contingently, to
any person for a finder's fee, brokerage commission, or other similar payment
in connection with the transactions contemplated by this Agreement, and Buyer
agrees to indemnify and hold Seller harmless from any such claims for such
payments made or threatened.
(e) Buyer will pay all of its own expenses whether or not
the transactions contemplated hereby are consummated.
13. NON-DISCLOSURE. Except as required by law, Seller covenants
that Seller shall not disclose after the Closing to anyone other than Buyer
and the accountants, attorneys and employees of Seller any of the records of
Seller relating exclusively to the Products, including any records relating
to customers, suppliers, sales representatives or distributors or contract
manufacturers of Seller. Buyer shall not disclose any of such records, except
as required by law, including the rules and regulations of the Securities and
Exchange Commission, and except to its employees, attorneys and accountants.
14. PUBLIC DISCLOSURE. Buyer, Seller and APS agree not to make or
cause to be made, whether orally or in writing or otherwise, any public
announcement or disclosure with respect to the transactions contemplated by
this Agreement or any of the provisions of this Agreement without prior
written approval by the other parties hereto of the form and content of such
announcement or disclosure and except as may be required by the rules and
regulations of the Securities and Exchange Commission.
15. NON-COMPETITION BY THE SELLER AND APS. As partial consideration
of the purchase price to be paid in accordance herewith, Seller and APS, each
on behalf of itself and its subsidiaries, agrees that, for one year after the
Closing, it will not for its own account or the account of an affiliate (as
defined in Rule 405 promulgated under the Securities Act of 1933, as amended),
in any manner, directly or indirectly, either
9
<PAGE>
alone or in conjunction with others, engage in the manufacture, development,
promotion, distribution, or sale of any product, directly competitive with
the Product sold hereunder.
16. SALE OF THE INVENTORY.
(a) On June 29, 1999, Seller shall transfer to Buyer all
items of inventory (the "Inventory") of Seller on hand as of June 30, 1999,
and all items of Inventory owned by Seller and not on hand on, by July 31,
1999, and Buyer shall acquire from Seller all such Inventory, raw materials
and work in progress on the Closing, provided, however, Buyer will acquire no
more units of each finished goods Product as equal the number of net units
(sales less returns) of such respective Product sold in the twelve months
ended June 30, 1999; provided or to make a respective finished goods product,
however, that all such Inventory acquired for each respective finished goods
Product shall have an expiration date of at least twenty-three months from
July 31, 1999.
(b) Buyer shall pay for raw materials, work in progress and
finished goods included in the Inventory of each Product as per the values
set forth as Exhibit H hereto.
(c) On July 31, 1999 Seller shall take and deliver to Buyer a
physical inventory of the finished goods and components of the Product and
related display material. Within ten (10) business days after receipt at its
facilities, Buyer shall notify Seller of any subsequent corrections to said
Inventory. If there is a difference in excess of five percent (5t), Seller
shall be entitled to take, at its sole expense, a physical inventory itself
at Buyer's facility, upon reasonable notice and without unduly interfering
with Seller's operations provided such physical inventory is taken within two
weeks of the notice to Seller provided for in the immediately proceeding
sentence. Any adjustment in that Inventory Amount shall be reflected in an
adjustment of the amount required to be paid pursuant to this Section 16. As
the initial payment for the inventory; Buyer shall pay Seller Twenty-Five
Thousand Dollars ($25,000) at the Closing and any balance due for the
Inventory not later than the thirtieth (30th) day after Buyer receives the
Inventory.
(d) Seller shall deliver said Inventory to Buyer in
quantities in accordance with Buyer's reasonable instructions, at Buyer's
shipping cost. Title shall be assumed to have passed upon the Closing and
upon Closing, Buyer shall insure the Inventory.
(e) For any inventory of the Products not acquired by Buyer,
Seller and Buyer shall agree upon a method to dispose of such inventory in a
manner which will not disrupt or compete with Seller's ongoing sales of the
Products.
17. NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given when received, if
mailed, first class and certified or registered, postage prepaid or sent by
telefax, Federal Express or
10
<PAGE>
another air courier service for next business day delivery which requires a
recipient, addressed to the party for whom they are intended at the following
addresses:
If to Seller:
Premier Consumer Products, Inc.
106 Grand Ave.
Englewood, NJ 07631
Attn: President
Telefax: (201) 568-9700
If to Buyer:
LEE PHARMACEUTICALS, INC.
1434 Santa Anita Avenue South
El Monte, California 91733
Attn: Ronald G. Lee, President
Telefax: (626) 575-0513
If to APS:
Advanced Polymer Systems, Inc.
123 Saginaw Drive
Redwood City, CA 94063
Attn: Michael O'Connell, Executive Vice President
Telefax: (650) 365-6490
Such names and addresses may be changed by written notice, as described in
this Section 17.
18. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement, including the
Exhibits and certificates referred to herein which are a part hereof,
contains the entire understanding of the parties hereto with respect to the
subject matter contained herein and maybe amended or terminated only by a
written instrument executed by Seller, and Buyer or their respective legal
representatives, successors or permitted assigns. The Section headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
19. GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of California.
20. PARTIES IN INTEREST. This Agreement shall inure to the benefit
of and be binding upon Seller and Buyer, and their respective successors and
permitted assigns.
11
<PAGE>
21. 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 reasonable attorney's and paralegal's
fees and incidental cost incurred by said prevailing party.
22. NO MERGER. This Agreement and all Exhibits and Annexes hereto
shall survive the closing and remain in full force and effect under their
respective terms.
23. FACSIMILE EXECUTION. Execution of this Agreement or any
Exhibits hereto shall be deemed binding upon the party executing this
Agreement or such Exhibits and notwithstanding that delivery of the executed
document may be by facsimile transmission. Any party shall be entitled to
rely on a faxed execution copy of this Agreement and such Exhibits with the
same force and effect as if an originally inked execution copy were
delivered. Inked original documents shall be delivered to the other parties
by Federal Express within three business days of the facsimile transmission.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first written above.
LEE PHARMACEUTICALS, INC. a California corporation
By: Ronald G. Lee
---------------------------------
PREMIER CONSUMER PRODUCTS, INC, a Delaware corporation
By: John Boylan
---------------------------------
ADVANCED POLYMER SYSTEMS, INC. agrees to abide by and be bound by the
terms of this Agreement insofar as they apply to it.
ADVANCED POLYMER SYSTEMS, INC.
By: Bob Albus
---------------------------------
13
<PAGE>
LIST OF ANNEXES
The Company will agree to provide to the Commission, upon request, the
Annexes included herewith.
Annex I Bill of Sales
Annex II Assignment
Annex III Promissory Note
Annex IV Security Agreement
14
<PAGE>
EXHIBIT 10.2
STRAIGHT NOTE
$200,000 South El Monte, California June 28, 1999
For value received, Lee Pharmaceuticals promises to pay Mark DiSalvo or
order, at South El Monte, California the sum of TWO HUNDRED THOUSAND DOLLARS,
with interest from June 28, 1999, on unpaid principal at the rate of twenty (20)
per cent per annum; principal is payable monthly, commencing on August 15, 1999,
with monthly principal payments of $10,000. Interest shall be calculated on the
basis of the unpaid principal balance daily, based on a 365 day year, actual day
month, 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
following trademarks; Aloe E, Aloe 99, Amitone, Aquafilter, Baby Gasz, Baby
Gumz, Beau Kreml, Bikini Bare, Breath-Gard, Brush'n Floss, Cheracol, Creamalin,
Creo-Terpin, Dentlock, Dr. Hands, Evac-U-Gen, Femiron, iodex Klutch, Liquiprin,
Peterson's Ointment, Pristeen, Rose Milk, Saxon, Stop'n Grow, Sundance,
TearGard, ThexForte, Venture, and Zonite.
June 30, 1999 RONALD G. LEE
------------- ----------------------------------------
Date Lee Pharmaceuticals -- Ronald G. Lee
June 30, 1999 MICHAEL L. AGRESTI
------------- -----------------------------------------
Date Lee Pharmaceuticals -- Michael L. Agresti
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 709
<ALLOWANCES> (233)
<INVENTORY> 2,441
<CURRENT-ASSETS> 3,607
<PP&E> 6,708
<DEPRECIATION> (6,269)
<TOTAL-ASSETS> 7,789
<CURRENT-LIABILITIES> 5,903
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> (2,964)
<TOTAL-LIABILITY-AND-EQUITY> 7,789
<SALES> 6,325
<TOTAL-REVENUES> 6,803
<CGS> 2,738
<TOTAL-COSTS> 6,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 547
<INCOME-PRETAX> (77)
<INCOME-TAX> 0
<INCOME-CONTINUING> (77)
<DISCONTINUED> 0
<EXTRAORDINARY> (374)
<CHANGES> 0
<NET-INCOME> (451)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
