-----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, PotSlJFR9uZR2cY8fTMdca6djbd1+POrWnSb8zx6gttYWt+rgpxL+bx3iZt6jsbl TmKlE+uunYB+Wq3s5SRcyg== 0001047469-99-031909.txt : 19990816 0001047469-99-031909.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031909 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688730 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 10QSB 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 --- --- LEE PHARMACEUTICALS BALANCE SHEET JUNE 30, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED)
ASSETS 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 ------- -------
See notes to financial statements. LEE PHARMACEUTICALS BALANCE SHEET JUNE 30, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED)
LIABILITIES 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 --------------- ---------------
See notes to financial statements. 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, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 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) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See notes to financial statements. LEE PHARMACEUTICALS STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED JUNE 30, 1999 1998 ------------- ------------- (UNAUDITED) (UNAUDITED) 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 ------------- ------------- ------------- -------------
See notes to financial statements. 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. 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. 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. 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. 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 $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 "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. 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. 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 EX-10.1 2 EXHIBIT 10.1 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 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 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 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 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 (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 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 (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 (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 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 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 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 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 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 EX-10.2 3 EXHIBIT 10.2 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 EX-27 4 EXHIBIT 27 FDS
5 1,000 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 4 0 709 (233) 2,441 3,607 6,708 (6,269) 7,789 5,903 0 0 0 413 (2,964) 7,789 6,325 6,803 2,738 6,464 0 0 547 (77) 0 (77) 0 (374) 0 (451) (.11) (.11)
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