-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gxi/A/uKQYcKzMCbg6LtFDyHJe49RsauV5ftSecqKFbnYnNKrSCE0iMFRIgIva7v qztojyDCFAyKKt2W413+zQ== 0001047469-98-029247.txt : 19980805 0001047469-98-029247.hdr.sgml : 19980805 ACCESSION NUMBER: 0001047469-98-029247 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEE PHARMACEUTICALS CENTRAL INDEX KEY: 0000058411 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 952680312 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-07335 FILM NUMBER: 98676708 BUSINESS ADDRESS: STREET 1: 1444 SANTA ANITA AVE CITY: SOUTH EL MONTE STATE: CA ZIP: 91733 BUSINESS PHONE: 8184423141 MAIL ADDRESS: STREET 1: 1444 SANTA ANITA AVENUE STREET 2: 1444 SANTA ANITA AVENUE CITY: SOUTH EL MONTE STATE: CA ZIP: 91733 FORMER COMPANY: FORMER CONFORMED NAME: LEE INDUSTRIES INC DATE OF NAME CHANGE: 19720113 10QSB 1 10-QSB 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 ------------- -------------------------- 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) 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 ------ ------ FORM 10-QSB LEE PHARMACEUTICALS BALANCE SHEET JUNE 30, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED) 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 ------- TOTAL $ 6,442 ------- -------
See notes to financial statements. FORM 10-QSB LEE PHARMACEUTICALS BALANCE SHEET JUNE 30, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED) 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 -------- Total liabilities 8,412 -------- 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) -------- Total stockholders' deficiency (1,970) -------- TOTAL $ 6,442 -------- --------
See notes to financial statements. FORM 10-QSB LEE PHARMACEUTICALS STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, 1998 1997 1998 1997 ----------- ------------ ----------- ----------- UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 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 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to financial statements. FORM 10-QSB LEE PHARMACEUTICALS STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED JUNE 30, 1998 1997 ----------- ---------- (UNAUDITED) (UNAUDITED) 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 ---------- ---------- ---------- ----------
See notes to financial statements. 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 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 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. 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 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. 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. 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) EX-10.1 2 EXHIBIT 10.1 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). 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 EX-10.2 3 EXHIBIT 10.2 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 EX-10.3 4 EXHIBIT 10.3 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. 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 EX-10.4 5 EXHIBIT 10.4 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 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 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 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 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 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 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 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 EX-27 6 EXHIBIT 27
5 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 9 0 909 (171) 2,128 3,770 6,643 (6,158) 6,442 4,116 0 0 0 413 (2,383) 6,442 6,402 7,017 2,848 7,315 0 0 470 (859) 0 (859) 0 0 0 (859) (.20) (.20)
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