<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934)
(Amendment No. ____)
Crown Laboratories, Inc.
(Name of Issuer)
Crown Laboratories, Inc.
(Name of Person(s) Filing Statement)
Warrants Expiring between 1996 and 1997
(Title of Class of Securities)
None
(CUSIP Number of Class of Securities)
Ronald P. Givner, Esq.
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Los Angeles, California 90067
(Name, Address and Telephone Number of Person Authorized to Received Notices
and Communications on Behalf of the Person(s) Filing Statement)
February 15, 1996
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation Amount of Filing Fee
$2,582,235.20* $516.45
- --------------------------------------------------------------------------------
The Warrants are being modified to allow for the exercise of $1.375 per
share of Common Stock. Pursuant to Rule 457(g), the filing fee is based on the
market price for the Common Stock ($1.75) as determined by Rule 457(c) and
0-11(4), times 1,475,563 Warrants.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid: ________________________________________________________
Form or Registration No.: ______________________________________________________
Filing Party: __________________________________________________________________
Date Filed: ____________________________________________________________________
<PAGE> 2
ITEM 1. Security and Issuer.
(a) Crown Laboratories, Inc. ("Crown"), 6780 Caballo Street, Las
Vegas, Nevada 89119.
(b) Warrants to purchase Common Stock expiring between 1996 and 1997
and currently exercisable at $3.00 per underlying share (the "Warrants").
There are 1,475,563 Warrants outstanding, 28,750 of which are held by officers
or directors of Crown. The offer relates to temporarily reducing the exercise
price of the Warrants and extending by one year the termination date of the
Warrants not tendered provided at least 60% of a holders Warrants are tendered
and exercised. See in general Exhibit A hereto, the Offer dated February 15,
1996 of Crown (the "Offer"), particularly the section "the Offer" and
"Description of the Warrants", in the Offer. (For information on the
underlying Common Stock, the information in the Offer under the headings
"Summary Informatijon About the Company - Securities Outstanding" and
"Description of Capital Stock" is hereby incorporated herein by reference.)
(c) There is no public market for the Warrants. (For the Common Stock
the information in the Offer under the heading "Market Price of Common Stock"
is hereby incorporated herein by reference.)
(d) Crown Laboratories, Inc. ("Crown"), 6780 Caballo Street, Las
Vegas, Nevada 89119.
ITEM 2. Source and Amount of Funds or Other Consideration.
(a) See "Source of Funds" in the Offer.
(b) Not Applicable.
ITEM 3. Purpose of the Tender Office and Plans or Proposals of the Issuer or
Affiliate.
See "Purpose of the Offer" in the Offer.
ITEM 4. Interest in Securities of the Issuer.
See "Recent Transactions" in the Offer.
ITEM 5. Contracts, Arrangements, Understandings or Relationships with Respect
to the Issuer's Securities.
None.
ITEM 6. Persons Retained, Employed or to Be Compensated.
Not applicable.
ITEM 7. Financial Information.
(a) See the Financial Statements in Exhibits A and B to the Offer
which are hereby incorporated herein by reference. The information in the
Offer under the heading "Summary Information About the Company - Financial
Information" is hereby incorporated herein by refernce.
(b) Not applicable.
ITEM 8. Additional Information.
(a) Not applicable; but see the information in Items 10 and 12 of
Exhibit A to the Offer.
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(b) The information in the Offer under the heading "Blue Sky Laws"
is hereby herein incorporated by reference.
(c) Not applicable.
(d) Not applicable.
(e) See the entire Offer and related Letter of Transmittal.
ITEM 9. Material to Be Filed as Exhibits.
(1)(a) The Offer and related Letter of Transmittal.
(2)(a) Cover letter dated February 15, 1996.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: February 15, 1996 CROWN LABORATORIES, INC.
By /s/ CRAIG E. NASH
-------------------------------------
Craig E. Nash
Chief Executive Officer
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February 15, 1996
CROWN LABORATORIES, INC.
WARRANTS FOR COMMON STOCK
This offer expires on March 15, 1996
at 5:00 p.m., Eastern Standard Time,
unless extended
__________________
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
__________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
(SEE "RISK FACTORS" ON PAGES 17 TO 21)
________________
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH HEREIN, THE OFFER IS BEING MADE
TO ALL EXISTING WARRANTHOLDERS OF CROWN LABORATORIES,
INC. AND CERTIFICATES REPRESENTING THE WARRANTS MAY BE TENDERED AND EXERCISED
IN ACCORDANCE WITH THE TERMS HEREOF.
__________________
TO THE HOLDERS OF WARRANTS EXPIRING IN 1996 AND 1997 OF CROWN LABORATORIES, INC.
Crown Laboratories, Inc. (the "Company") hereby offers to holders of its
Warrants to lower the exercise price of the Warrants each holder owns of record
from $3.00 per share of Common Stock to $1.375 per share of Common Stock
provided that at least 60% of the Warrants held by a recordholder are exercised
and, if at least 60% of such Warrants are exercised, the Company will extend
the terms of the remaining Warrants held by each such holder for one year. To
accept this Offer the Warrants must be tendered and exercised on or prior to
5:00 p.m. Eastern Standard Time on March 15, 1996, unless such date is extended
by the Company in its sole discretion. Each record holder of Warrants must
either accept the Offer and exercise at least 60% of his Warrants at $1.375 per
share and have the expiration date of the balance, if any, if his Warrants
extended for one year at an exercise price of $3.00 per share or retain his
current Warrants on their current terms. A holder of the Warrants may tender
and exercise at $1.375 per share over 60% of the Warrants held by him for
tender and exercise pursuant to this Offer.
<PAGE> 5
The Warrants were issued in private placements from September 1994 to
September 1995 pursuant to which 25,000 shares of the Company's Common Stock
and 12,520 Warrants were sold as Units for $50,000. Each Warrant is
exercisable for one share of Common Stock at $3.00 per share and the Warrants
terminate between December 1996 and April 1997.
THE OFFER EXPIRES AT 5:00 P.M., EASTERN STANDARD TIME, ON MARCH 15,
1996 UNLESS EXTENDED. On February 13, 1996, the last sale price of the Common
Stock was $1-11/16 as reported by the American Stock Exchange Emerging Company
Marketplace. The Company will accept for tender and exercise any and all
Warrants duly tendered and exercised pursuant to the Offer. There are
1,475,563 Warrants outstanding and the Offer applies to all of the Warrants.
Officers and directors of the Company own 28,750 of the Warrants. The Company
has not obtained a fairness opinion concerning the Offer.
The terms of the Offer were determined arbitrarily by the Company.
EXISTING WARRANTHOLDERS MUST MAKE THEIR OWN DECISION AS TO WHETHER TO
TENDER AND EXERCISE THE WARRANTS PURSUANT TO THE OFFER AND, IF SO, HOW MANY
WARRANTS TO TENDER AND EXERCISE PURSUANT TO THIS OFFER.
No market has existed or is likely to exist for such Warrants. The
Warrants and the underlying Common Stock are "restricted securities" and the
Warrants have not been registered under the Securities Act of 1933. The shares
underlying the Warrants have been registered under such Act for resale by the
holder of such Warrants.
The Company has its principal place of business and executive offices
at 6780 Caballo Street, Las Vegas, Nevada 89119; telephone number (702)
696-9300. Questions should be directed to the Company, Attention: Scott
Hilley, Vice President Finance. (Please call collect).
ANY WARRANTHOLDER WISHING TO ACCEPT THE OFFER SHOULD EITHER (A)
COMPLETE AND SIGN THE ENCLOSED LETTER OF TRANSMITTAL AND FORWARD IT WITH HIS
WARRANT(S), THE REQUIRED CHECK FOR THE EXERCISE PRICE AND ANY OTHER REQUIRED
DOCUMENTS TO THE COMPANY AT THE ADDRESSES SET FORTH ABOVE OR (B) REQUEST HIS
BROKER OR DEALER TO EFFECT THE TRANSACTION FOR HIM.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFER OTHER THAN THOSE CONTAINED HEREIN
AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS DOCUMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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Table of Contents
<TABLE>
<S> <C>
The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
Purpose of the Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
Source of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
Expiration Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
Withdrawal Rights and Return of Warrants Not Tendered and Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
How to Tender and Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
Certain Condition of the Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
Blue Sky Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Solicitation of Tenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Recent Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Subsequent Purchase of Warrants and Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Summary Information About the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Market Price of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Recent Significant Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Description of The Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
</TABLE>
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<PAGE> 7
Appendix A - Crown Laboratories, Inc.'s Form 10-KSB (as amended) for its fiscal
year ended December 31, 1994
Appendix B - Crown Laboratories, Inc.'s Form 10-QSB for the fiscal quarter
ended September 30, 1995
Any statement contained in Appendices A and B hereto shall be deemed
to be modified or superseded for purposes of this Offer to the extent that a
statement contained herein modifies or replaces such statement. Any statement
so modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Offer.
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<PAGE> 8
The Offer
The Company hereby offers to the holders of its Warrants duly tendered
on the following basis:
To lower the exercise price per share from $3.00 per share to $1.375
provided at least 60% of the Warrants held by a record holder are
exercised by such holder during the terms of this Offer. If at least
60% of a holder's Warrants are exercised, the Company will extend the
expiration date of any remaining Warrants not tendered and exercised.
Each record holder of Warrants must either accept the Offer during its
term and exercise at least 60% of his Warrants at $1.375 per share and
have the expiration date of the balance of his Warrants extended for
one year at an exercise price of $3.00 per share or retain his current
Warrants on their current terms. A holder of Warrants may tender
and exercise at $1.375 per share over 60% of the Warrants held by him
for tender and exercise pursuant to this Offer.
Subject to the terms and conditions described below, Company is
obligated to accept tenders and exercises of all of the outstanding Warrants
tendered and exercised pursuant to the Offer, if any are accepted.
Purpose of the Offer
The Company has proposed the Offer at this time since the Warrants
expire between December 1996 and April 1997. Further, with the unanticipated
delays in getting the liquid products manufacturing on-line, the unanticipated
additional cost associated therewith and the current market price of the Common
Stock of the Company being less than the price included in the Units in which
the Warrants and Common Stock were sold, the Company is making the Offer to
allow the holders of the Warrants to reduce their average cost per share of
Common Stock. In addition, the exercise of a significant number of the
Warrants would provide the Company with additional working capital.
There was no independent committee of the Board of Directors of The
Company which considered the Offer. The Board of Directors unanimously
approved the Offer. No appraisal rights are available under Delaware law for
the holders of the Warrants and the Company will not extend such rights to
holders of the Warrants. The Offer is not dependent on approval of a vote of
the holders of a majority of the Warrants nor was an independent committee
appointed to represent the Warrantholders.
The following officers and directors hold Warrants which they will
tender pursuant to the Offer:
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<PAGE> 9
<TABLE>
<CAPTION>
Name Number of Warrants
---- ------------------
<S> <C>
Dr. Linda Carrick Ph.D. 12,500
Christopher Demetree 10,000
Lee Allen Hooker 6,250
</TABLE>
Warrantholders who do not accept the Offer will continue to hold their
Warrants under their original terms. Upon the tender and exercise of a Warrant
pursuant to the Offer, a Warrant will be retired.
ACCEPTANCE OF THE OFFER BY HOLDERS OF THE WARRANTS IS COMPLETELY
VOLUNTARY. THE COMPANY DOES NOT MAKE ANY RECOMMENDATION TO THE EXISTING
WARRANTHOLDERS TO TENDER AND EXERCISE OR REFRAIN FROM TENDERING AND EXERCISING
ANY OR ALL OF THEIR WARRANTS ELIGIBLE TO BE TENDERED AND EXERCISED NOR WILL IT
SOLICIT ANYONE TO TENDER AND EXERCISE OR NOT TO TENDER AND EXERCISE HIS
WARRANTS. THE DECISION WHETHER OR NOT TO TENDER AND EXERCISE MUST BE MADE BY
EACH WARRANTHOLDER BASED UPON HIS INDIVIDUAL INVESTMENT OBJECTIVES, TAX
POSITION AND OTHER FACTORS AFFECTING HIM PERSONALLY.
Other than as discussed herein, the Company and its affiliates have no
plans and the executive officers and directors of the Company have no plans
relating to:
(a) The acquisition of additional securities of the
Company or the disposition of securities of the Company (As described in
"Recent Significant Development - Funding," and "Recent Significant
Developments - Financial Condition", the Company is seeking to raise additional
working capital which will likely involve the issuance of additional equity
securities. However, as of the date hereof, the Company has no letter of
intent or definitive agreements to sell any securities.);
(b) An extraordinary corporate transaction, such as a
liquidation, involving the Company or any of its subsidiaries;
(c) A sale or transfer of a material amount of assets of
the Company or any of its subsidiaries;
(d) Any change in the present Board of Directors or
management of the Company, including, but not limited to, any plans or
proposals to change the number or the term of directors, to fill any existing
vacancy on the Board or to change any material term of the employment contract
of any executive officer;
(e) Paying dividends or changing the dividend policy or
indebtedness or capitalization of the Company;
(f) Any other material change in the Company, its
corporate structure or business;
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<PAGE> 10
(g) Changing the Company's Certificate of Incorporation
or By-Laws or taking other actions which might impede the acquisition of
control of the Company by any person;
(h) Causing a class of equity security of the Company to
be delisted from a national securities exchange or to cease to be authorized to
be quoted in an inter-dealer quotation system of a registered national
securities association (The Common Stock will continue to be listed on the
American Stock Exchange Emerging Common Marketplace; there is no market for the
Warrants);
(i) Causing a class of equity security of the Company to
become eligible for termination of registrant pursuant to Section 12(g)(4) of
the Securities Exchange Act of 1934, as amended; or
(j) Causing the suspension of the Company's obligation to
file reports pursuant to Section 15(d) of the Securities Exchange Act of 1933,
as amended.
Source of Funds
To consummate the Offer, the Company believes it will need
approximately $10,000 in expenses which it will pay out of existing working
capital.
Expiration Date
As used in this Offer, the term "Expiration Date" means 5:00 p.m., New
York time, on March 15, 1996; provided, however, that if the Company, in its
sole discretion, has extended the period of time for which the Offer is open,
the term "Expiration Date" means the latest time and date to which the Offer is
extended.
The Offer may be extended by notice from the Company to each
Warrantholder, but in no event shall the Offer be extended beyond 120 days from
the date of this Offer.
Withdrawal Rights and Return of Warrants
Not Tendered and Exercised
Warrants may be withdrawn and will be returned to tendering
Warrantholders (including any cash paid) at any time until the Expiration Date,
including any extension thereof.
To be effective, a written or telegraphic notice of withdrawal must be
timely received by the Company at its address set forth herein. Any notice of
withdrawal must specify the name of the person who executed the particular
Letter of Transmittal, the number of the Warrants to be withdrawn and, if
certificates have
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<PAGE> 11
been delivered to the Company, the name of the registered holder and the serial
numbers shown on the particular Warrants certificates evidencing the Warrants
to be withdrawn. All questions as to the validity (including time of receipt)
of such notices will be determined by the Company, in its sole discretion,
whose determination shall be final and binding. Warrants withdrawn as provided
herein will not be deemed tendered for purposes of the Offer.
How to Tender and Exercise
A holder of Warrants may tender and exercise such Warrants by properly
completing and signing (including a guarantee of such signature, if required)
the Letter of Transmittal and delivering the Letter of Transmittal and his
Warrant certificates to the Company on or prior to the Expiration Date of the
Offer, accompanied by a check for the exercise price ($1.375 per share of
Common Stock).
Tenders and exercise of Warrants may only be made by the record
holders of the Warrants. Therefore, all beneficial owners must have the record
holder complete a Letter of Transmittal and complete the tender and exercise.
If tendered and exercised Warrants are registered in the name of a
person other than the signer of the Letter of Transmittal, the tendered
certificates must be (i) endorsed or accompanied by stock powers signed by the
registered owner and (ii) accompanied by any necessary stock transfer tax stamp
or proof of exemption from payment of such tax, and the signature on the
endorsement or stock power must be guaranteed by a commercial bank, savings and
loan association or trust company having a branch or agency in the United
States or by a member firm of a national securities exchange or the National
Association of Securities Dealers, Inc. ("NASD") (collectively, "Eligible
Institutions").
A tender and exercise will be deemed to have been made only when the
tendering Warrantholder's duly signed Letter of Transmittal accompanied by all
required documents and the required check for the exercise price of the Common
Stock is received by the Company. Tendered Warrants which are not tendered and
exercised in proper form will be held by the Company and, if practicable, a
correction letter will be forwarded to the tendering Warrantholder. If the
tender and exercise is not put in proper form within a reasonable time, then
the improperly tendered Warrant will be returned, without cost, by the Company
to the tendering holder as soon as practicable. Any irregularities in
connection with the tender and exercise of Warrants must be cured within such
time as the Company shall determine, unless waived by the Company in its sole
discretion.
A tendering Warrantholder may tender and exercise less than all of the
Warrants represented by the certificate he holds by
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<PAGE> 12
appropriately marking the Letter of Transmittal accompanying his tendered
Warrants (but at least 60% of all of the Warrants held by a holder must be
tendered and exercised).
THE DELIVERY OF ALL DOCUMENTS, INCLUDING WARRANT CERTIFICATES AND THE
REQUIRED CHECK FOR THE EXERCISE PRICE, IS AT THE RISK OF THE TENDERING
WARRANTHOLDER. IF DELIVERY IS BY MAIL, INSURED REGISTERED MAIL, RETURN RECEIPT
REQUESTED, IS SUGGESTED.
Properly executed facsimile copies of the Letter of Transmittal will
be accepted.
Any holder of the Warrants should consult with his tax advisors with
regard to the tax consequence to such holder of accepting the Offer.
Certain Condition of the Offer
The Company may terminate or amend the Offer if any of the following
events occurs before the Expiration Date and shall not be required to accept
any Warrants tendered and exercised if any such events has occurred before it
has accepted for tender and exercise such Warrants: there shall have been
instituted or threatened an action or proceeding before any court or
administrative agency, by any government agency challenging the acquisition by
the Company of the Warrants or the issuance of the underlying Common Stock or
otherwise relating to the Offer, other than actions or proceedings that have
already been instituted. The Company may decide in its sole discretion whether
any of the events set out in this paragraph have occurred and, if so, whether
or not to terminate or amend the Offer or accept Warrants, as the case may be.
Any material changes in the terms of the Offer or in information
concerning such Offer will be disseminated to the Warrantholders and such
changes or information may result in the Offer being extended for a sufficient
period of time to allow Warrantholders to consider such information in deciding
whether or not to tender and exercise Warrants.
Blue Sky Laws
This Offer is not being made to, nor will the Company accept tenders
from, holders of the Warrants in any jurisdictions of the United States in
which this Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction. In those jurisdictions in
which the securities or blue sky laws require this Offer to be made by a
licensed broker or dealer, this Offer will be made on behalf of the Company
only by registered brokers or dealers who are licensed under the laws of such
jurisdiction.
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<PAGE> 13
Issuance of Common Stock
Issuance of the Common Stock and amendments to the Warrants extending
their term to the tendering and exercising Warrantholders upon acceptance by
the Company will be made as soon as practicable after the Expiration Date. All
such issuances will be mailed by the Company or its transfer agent.
Solicitation of Tenders
The Company will not pay any fees or commissions to any broker or
dealer or any other person for soliciting tenders and exercise of the Warrants
pursuant to this Offer. Brokers, dealers, commercial banks and trust companies
will be reimbursed by the Company for customary mailing and handling expenses
incurred by them in forwarding offering materials to their customers.
Payment of Expenses
The expenses to be incurred in connection with the Offer are estimated
as follows: Transfer Agent ($3,000), reproduction and mailing ($3,000), legal
fees ($3,000), and miscellaneous other items ($1,000). Total fees are
estimated at $10,000, all payable by the Company.
Transfer Taxes
The Company will pay all transfer taxes, if any, applicable to the
transfer to it and the exercise of Warrants under the Offer but only from the
registered holders thereof and issuance of the underlying Common Stock.
Recent Transactions
There have been no transactions in the Warrants or the underlying
Common Stock that was effected during the past 40 business days by the Company
or by any officer, director or controlling person of the Company, except as set
forth below.
On the dates set forth below, the following individual purchased
shares of the Company's Common Stock on the American Stock Exchange as follows:
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<TABLE>
<CAPTION>
Name Date Price Number of Shares
---- ---- ----- ----------------
<S> <C> <C> <C>
Craig Nash 1/5/96 $1.50 10,000
</TABLE>
See also "Recent Significant Developments -- Funding" and "Recent
Significant Developments -- Financial Condition."
Subsequent Purchase of Warrants and Common Stock
While the Company has no obligation to do so, it reserves the right,
after the expiration of the Offer, to make subsequent offers to acquire
Warrants or purchase Warrants directly from Warrantholders or the Company's
Common Stock, or to lower the exercise price on such terms and conditions as
may then be specified, although no such purchases of Warrants or Common Stock
or changes will be made by the Company, or its affiliates, within ten business
days after the Expiration Date.
Use of Proceeds
If all Warrants are tendered and exercised the Company would receive
$2,028,899 in gross proceeds. Any proceeds received upon the tender and
exercise of the Warrants will be used for working capital.
Summary Information About the Company
The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Offer or the Exhibits thereto.
The Company
The Company is engaged in the development of, and intends to
manufacture and market, a proprietary line of pharmaceutically-balanced
nutritional and medical application products designed for the special needs of
residents in nursing homes and patients in hospitals. Generally, these
individuals are over age 70, and prefer foods that are easy to ingest, or are
flavorful, or easily digestible, and nutritionally complete. The Company's
liquid products will be provided in aseptically sealed, flexible packages.
Formulations are designed to provide a maximum of nutrient and caloric support
in easily consumable forms. The Company currently intends to offer four liquid
products, two medical solutions, and 26 dry-mixed products for use by
individuals with dietary restrictions including low sodium diets and diabetic
-11-
<PAGE> 15
diets. Additionally, caloric enhancement and nutritional supplement products
will be available.
The Company's product lines will consist of standard products for
nursing homes and specialized products such as those for kidney dysfunction and
tube feeding. Currently the Company is in the final stages of completing the
liquid manufacturing line on which it will produce primary products for sale.
The Company will have limited sales until such line is complete and
operational.
The commissioning process has begun with regard to the Company's
proprietary line of aseptic liquid products. The commissioning process is
required to be completed in order to manufacture the liquid products. See
"Recent Significant Developments -- Manufacturing Plant."
The Company was incorporated in Delaware on February 23, 1989. The
Company's address and telephone number are 6780 Caballo Street, Las Vegas,
Nevada 89119; (702) 696-9300.
<TABLE>
<S> <C>
Securities Outstanding
- ----------------------
Number of Shares of Common Stock
Outstanding on December 31, 1995(1) . . . . . . . . . . . 14,290,513 shares.
Number of Shares of Series C Preferred
Stock Outstanding on December 31, 1995(1) . . . . . . . . 258.8 shares.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . An investment in the Common Stock involves a high
degree of risk. Prospective investors should
review carefully and consider the factors
described in "Risk Factors."
</TABLE>
- ------------------------
(1) Unless otherwise indicated, all references in the Offer to per share
data and number of shares exclude 5,661,230 shares of Common Stock
issuable upon exercise of outstanding warrants and options, including
options which have been granted under the 1992 Stock Option Plan.
Also does not include an undetermined number of shares of Common Stock
underlying Series C Preferred Stock.
-12-
<PAGE> 16
Financial Information
The following tables set forth for the periods indicated selected
financial information for Crown Laboratories, Inc.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
------------------------- ---------------------
December 31, 1994 December 31, 1993 Sept. 30, 1995 Sept. 30, 1994
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales(1) . . . . . . $ -0- $ -0- $ -0- $ -0-
Net loss . . . . . . (1,569,979) (660,964) (2,647,836) (845,588)
Net loss per share . (.15) (.09) (.20) (.08)
Average Number of
Shares Outstanding . 10,492,664 7,581,200 13,289,678 10,210,966
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1994 Sept. 30, 1995
----------------- ---------------
<S> <C> <C>
Working capital . . . $ 1,354,684 $ 660,797
Total assets . . . . 6,065,044 10,085,705
Total liabilities . . 1,355,581 2,807,130
Stockholders' equity 4,709,463 7,278,575
Book value per share $ .45 $ .55
---------- -----------
</TABLE>
_________________
(1) In the fourth quarter of 1995, the Company sold approximately $100,000
of dry mix products in one European country through an affiliate and
has collected a portion of the resulting receivables. Sales of liquid
products will not commence until the Company completes commissioning
of its liquid manufacturing lines in Las Vegas, Nevada. See "Recent
Significant Developments -- Manufacturing Plant."
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<PAGE> 17
Market Price of Common Stock
The Company's stock was listed on the American Stock Exchange Emerging
Company Marketplace ("Amex EMC") on March 29, 1994 and trades under the symbol
CLL.ec. Prior to that time, the Company's Common Stock was listed on the
Electronic Bulletin Board (EBB) of the NASD. The table below lists the low and
high bid price of the Common Stock for each quarter over the last two years.
<TABLE>
<CAPTION>
Calendar 1994 Calendar 1995
<S> <C> <C> <C> <C>
1st Quarter $5.00 $5.50 $2.25 $3.13
(EBB through 3/31/94)
2nd Quarter $1.50 $4.63 $2.39 $2.81
(Amex ECM)
3rd Quarter $1.50 $2.19 $1.88 $2.94
(Amex ECM)
4th Quarter $1.88 $3.06 $1.25 $1.94
(Amex ECM)
</TABLE>
From January 1, 1996 to February 13, 1996, the low and high closing
prices were $1.44 and $2.00, respectively.
The source of the above information comes from the American Stock
Exchange for Amex EMC quotes and the National Quotation Bureau, Inc. for EBB
quotes. Such EBB quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not reflect actual transactions.
Trading in the Common Stock has been limited and the above quotations
may not represent the true value of the Common Stock.
There are approximately 1,600 holders of the Common Stock.
The Company did not pay any dividends in the last two years and does
not intend to pay dividends in the foreseeable future. All available working
capital will be used to meet the Company's operations.
-14-
<PAGE> 18
Recent Significant Developments
Manufacturing Plant
The Company is presently in the process of seeking to commission the
equipment necessary to manufacture its proprietary line of aseptic liquid
products. Commissioning of the equipment is required by the U.S. Food and Drug
Administration. The commissioning process began on April 13, 1995 with the
manufacturer, (in this case, the Company), working with National Food
Laboratories (the Process Authority), to review its manufacturing equipment,
manufacturing procedures, manuals and monitor the bacteriological kill tests
for compliance with the applicable federal regulations. National Food
Laboratories is an international food and research and development organization
with laboratories facilities in Dublin, California, Washington, D.C. and
Seattle, Washington and is a wholly-owned subsidiary of the National Food
Processors Association.
After the samples of inoculated product (the final test required for
certification) are prepared, they are incubated for a 21 day period and, if the
test results are favorable, the Process Authority summarizes and presents their
findings to the F.D.A. on the Company's behalf. The F.D.A. then has 30 working
days to respond to the Company with additional questions or requests for
information. In the absence of such a request, the Company is authorized to
produce and market its products. There can be no assurances that the test
samples will pass the test criteria, or if they do pass, that the F.D.A. will
accept the Company's process and equipment.
Although the equipment manufacturers have warranted that the purchased
equipment has been manufactured to the F.D.A. regulatory specifications for
aseptic packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. company requiring F.D.A. aseptic processing approval.
The delays in certifying the Company's production equipment can be attributed
to the aseptic filling machine. The machine was unable to pass certification
testing when it was originally shipped from Germany and received by the Company
in February, 1995. Numerous modifications, primarily related to the
installation of monitoring devices to seek to meet F.D.A. requirements, have
been made to the machinery at the request of the Process Authority. The
manufacturer of the aseptic filling machine has filed for bankruptcy in the
German courts. The Company in June, 1995, filed a claim against the
manufacturer of the aseptic filler in the German Bankruptcy Court (bankruptcy
of Time Pack, GmbH) for damages caused by the delays in certifying the filler
and seeks to have these damages applied against the remaining balance of the
$1,730,000 purchase price of the machine, which claim is pending the decision
of the bankruptcy trustee. Further, the Company in March, 1995, filed suit in
Nevada District Court for the County of Clark, against the manufacturer and its
alter egos and subsidiaries alleging fraud, misrepresentation, and alter ego
among other allegations. The
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<PAGE> 19
Company is in the process of serving the complaint, as amended in September,
1995, on the defendants and no defendants have yet answered the complaint. To
further protect its rights to the machinery and its related technology, the
Company has purchased the blueprints and the rights to its aseptic filling
machine from the German Bankruptcy Court. Standard Chartered Bank ("Standard")
had provided financing to the manufacturer of the filler machine and Standard
has claimed that it has a $1,000,000 security an interest in the filler
machine. Based upon the representations made, the Company entered into a
letter of intent to finance $1,000,000 of such equipment through Standard.
Prior to entering into any loan documentation, the Company discovered that
Standard cannot provide written evidence of a perfected security interest.
Standard has nevertheless continued to allege that it has a security interest
in the machine and has filed a claim with the German Bankruptcy Court.
However, Standard has still not produced documentation supporting its position,
and the Company's claims currently exceed the amount of $1,000,000 which
Standard is allegedly owed. The Company cannot predict the ultimate outcome of
any of the above claims.
While the Company believes that the machinery will ultimately be
certified, there is no assurance that the machinery will receive certification
from the F.D.A. or that the certification will be granted within a specific
time frame. Furthermore, there can be no assurances that, if the machinery is
certified, as to when the Company will commence initial production of its
liquid nutritional products; or that the products will meet with acceptance in
the market.
The Company has spent approximately $7.5 million on equipment
acquisition for the manufacturing plant. It has also spent approximately $1.2
million on leasehold improvements for offices and upgrading the production area
to meet minimum standards required for manufacturing, which improvements and
upgrading are essentially complete. The Company has also received $1.9 million
in financing for such equipment and leasehold improvements. The equipment
purchased and financed included the necessary equipment to manufacture liquid
and dry mixed products, including boilers, tanks, mixers, processors, fillers
and packaging equipment, as well as all related plumbing and electrical
infrastructure.
The Company in June, 1995 received approval from the State of Nevada
Health Department to produce its dry mix product line for adult nutritional and
specialty products. In the fourth quarter of 1995, the Company sold
approximately $100,000 of dry mixed products in one European country through an
affiliate and has collected a portion of the resulting receivables.
The Company has received an option to purchase its current
manufacturing facility in Las Vegas, Nevada for $2,700,000 and intends to
pursue this option. The Company has secured a commitment for a first mortgage
loan of $1,860,000 on the building from an insurance company. The mortgage,
would carry an interest
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<PAGE> 20
rate of 8.65% and would provide for an 18 year amortization ($16,984 per mouth)
with a balloon payment due at the end of ten years at the insurance company's
request. The seller of the property has agreed to accept 153,043 shares of the
Company's Common Stock in lieu of $440,000 of the purchase price and has agreed
to extend a 3 year $300,000 second mortgage to the Company bearing a 12% annual
effective interest rate. The balance of the purchase price, ($100,000), plus
any closing costs will be paid by the Company.
FUNDING
Since September 30, 1994, the Company has raised approximately $8.1
million in net proceeds from the sale of its equity securities. Of such
amount, approximately $3 million was used to complete leasehold improvements at
the manufacturing facility, and for manufacturing equipment and other fixed
assets and the balance was used for working capital, including salaries and
rent.
From January 1, 1995 through September 30, 1995, the Company has
raised approximately $2,400,000 (before offering expenses of $330,000) in
equity financing through a private placement of the Units and this amount is
reflected in the Company's financial statements for such period. Each Unit was
purchased for $50,000. A Unit consisted of 25,000 shares of Common Stock and
the Warrants to purchase 12,500 shares of Common Stock for $3 per share. The
Warrants expire two years after issuance. (Fractional Units have been sold.)
In addition, the Company issued to the placement agents and brokers 2,500
options to acquire shares of the Company's Common Stock at a price of $2.40 per
share for each Unit sold. These options expire five years from the date of
issuance. Such private placement closed as of September 30, 1995.
The Company has also raised $3 million (before expenses of $150,000)
through the issuance of Series C Preferred Stock during the third quarter of
1995 and $1 million thereafter. The Series C Preferred Stock pays no
dividends, but imputes a 6% effective annual interest rate upon conversion into
Common Stock which will be accounted for over the time during which the
Preferred Stock is outstanding. The conversion rate is determined by the
acquisition value of the Preferred Stock (plus imputed interest referred to
above) and an 18% discount to the 5-day average market price of the Common
Stock at the time of exercise. As of December 31,1995, 141.2 shares of the
Series C Preferred Stock issued had been converted into 1,253,447 shares of
Common Stock.
The Company is seeking to raise additional working capital. To the
extent that the Company uses equity securities to raise additional funds to
satisfy its working capital needs, there will be additional dilution to the
Company's existing shareholders.
-17-
<PAGE> 21
None of the above securities were registered under the Securities Act
of 1933 and may not be sold in the United States in absence of such
registration or an exemption therefrom.
FINANCIAL CONDITION
Working capital at September 30, 1995 was $660,797 with $.8 million in
accounts payable attributable to capital expenditures and leasehold
improvements. Since September 30, 1995, the Company has raised an additional
[$1,000,000] from the sale of Series C Preferred Stock. Cash and equivalents
balances were $1.8 million as of September 30, 1995. The Company believes that
it has adequate funds to support its operations until early 1996 or, the
commencement of production of the Company's liquid nutritional products,
whichever comes first. After that time, the Company will require additional
funding to support its working capital needs as it begins to enter the market
or to provide for normal operating expenses if certification has not been
achieved.
The Company had forecasted that it would begin manufacturing its line
of dry mix nutritional and specialty dietary products in April 1995 and that
commissioning of the equipment to manufacture the Company's line of aseptic
liquid products would begin by the second quarter of 1995 and be completed
within a two month time frame. Due to unforeseen delays in finalizing the
installation of all the equipment necessary to manufacture the Company's
products, the commissioning process has been significantly delayed and sales
have yet to commence. As of February 13, 1996, limited quantities of dry mix
product have been sold and the aforementioned liquid products commissioning
process is underway with sales unlikely to commence until the second quarter of
1996.
While the Company believes that its machinery will ultimately be
commissioned and certified, there can be no assurances that the machinery will
receive certification from the F.D.A. or that the certification will be granted
within a specific time frame. Furthermore, there can be no assurances that, if
the machinery is certified, if and when the Company will commence initial
production of its liquid nutritional products or that the products will meet
with acceptance in the market. As a result of these delays, the Company has
been required to raise further funds to sustain operations until the plant
becomes operational and it may require further funds to support working capital
needs as it begins to enter the market or to provide for normal operating
expenses if commissioning continues to be delayed. The Company is presently
exploring possible alternatives for raising additional funds. There can be no
assurances that the Company will be able to secure the necessary financing, or
if a source of funding is identified, that the funding will be on terms and
conditions which are acceptable to the Company.
-18-
<PAGE> 22
Risk Factors
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN
SUBSTANTIAL RISKS AND WARRANTHOLDER SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS:
START UP RISK
In order to commence manufacturing liquid products, the Company must
finalize the commissioning of its liquid manufacturing line. Such
commissioning is required by the F.D.A. in connection with its regulation of
all aseptic facilities. For further information on this process, see "Recent
Significant Developments -- Manufacturing Plant". No assurances can be given
as to the time in which such certification will be completed.
Further, once the Company's machinery is certified and on-line, there
is no assurance that the equipment will operate as warranted or represented by
the manufacturers and, thus, whether the capacity of the plant will be as
planned by management of the Company.
Finally, while the Company has begun limited marketing activities, no
assurances will be given that the Company will obtain sufficient customers for
its products.
LIMITED OPERATING HISTORY; OPERATING LOSS
Since inception, the Company principally has been engaged in research
and development of its products. The Company did not have any sales for the
years ended December 31, 1993, 1994 and 1995 (except for a limited amount of
dry mixed products sold in the fourth quarter of 1995). The Company, together
with its predecessors, Nash Nutritional Products, Inc. and Roe Pharmaceutical
Co., formerly a majority owned subsidiary, incurred consolidated losses for the
period from March 3, 1980 (inception) to September 30, 1995. At September 30,
1995, the Company's accumulated consolidated deficit was ($6,603,714), while
consolidated Stockholders' Equity was $7,278,575. Lack of a liquid products
manufacturing facility has restricted the Company's marketing and sales
efforts. The Company and its operations are subject to the various risks
inherent in the start-up and development of a new business enterprise. Since
the operating history of the Company is limited, there can be no assurance that
the Company will operate profitably.
Working capital at September 30, 1995 was $660,797 with approximately
$800,000 in accounts payable attributable to capital expenditures and leasehold
improvements. Since September 30, 1995, the Company has raised an additional
($1,000,000) in gross proceeds from the sale of Series C Preferred Stock. The
Company is presently seeking long-term financing to support its liabilities.
There is no assurance the Company will be able to secure the necessary
financing on terms and conditions which are acceptable to the Company.
-19-
<PAGE> 23
NEED FOR MANUFACTURING FACILITY
The Company had previously produced its dry-mix and liquid dietary
products through contract manufacturers. However, prior arrangements had been
unsatisfactory in respect of timely manufacture and delivery and impact on
costs, particularly for liquid products and no contract manufacturers have been
used since 1992. In order to assure a supply of its liquid and dry-mix
products at a competitive price, management has determined that the Company
must operate its own manufacturing facility to produce both liquid and dry-mix
products. The Company intends to acquire its products only from its own
manufacturing facilities. See "Recent Significant Developments --
Manufacturing Plant".
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company believes that it has adequate funds to support its
operations until early 1996 or, the commencement of production of the Company's
liquid nutritional products, whichever comes first. After that time, the
Company will require additional funding to support its working capital needs as
it begins to enter the market or to provide for normal operating expenses if
certification has not been achieved. The Company is presently exploring its
possible alternatives for raising additional funds. There can be no assurances
that the Company will not require additional funds earlier than set forth above
or that the Company will be able to secure the necessary financing, (or if a
source of funding is identified, that the funding will be on terms and
conditions which are acceptable to the Company).
FUNDING
Through September 30, 1995, the Company has raised approximately
$2.4 million (before offering expenses of $330,000) in equity financing
through a private placement of the Units and this amount is reflected in
accompanying financial statements. Each Unit was purchased for $50,000. A
Unit consisted of 25,000 shares of Common Stock and Warrants to purchase 12,500
shares of Common Stock for $3 per share. The Warrants expire two years after
issuance. (Fractional Units have been sold.) In addition, the Company issued
to the Placement Agent and brokers 2,500 options to acquire shares of the
Company's Common Stock at a price of $2.40 per share for each Unit sold. These
options expire five years from the date of issuance.
The Company has also raised $3 million (before offering expenses of
$150,000) through the issuance of Series C Preferred Stock during the third
quarter of 1995 and $1,000,000 thereafter. The Series C Preferred Stock pays
no dividends, but imputes a 6% effective annual interest rate upon conversion
into Common Stock which will be accounted for over the time during which the
Preferred Stock is outstanding. The conversion rate is determined by the
acquisition value of the Preferred Stock (plus imputed interest referred to
above) and an 18% discount to the
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<PAGE> 24
five day average market price of the Common Stock at the time of exercise. As
of December 31, 1995, 141.2 shares of the Series C Preferred Stock issued had
been converted into 1,253,447 shares of Common Stock. To the extent that the
Company uses equity securities to raise additional funds to satisfy its working
capital needs, there will be additional dilution to the Company's existing
shareholders.
LACK OF PRODUCT PROTECTION
The Company regards the formulations of its products to be
proprietary, but presently it has no patent or other protective rights. The
Company has filed and currently has a patent pending on its primary liquid
product including its process and content. No assurances can be given that any
patent will be issued. Currently, the Company exerts substantial efforts to
protect trade secrets and to keep formulas and related process know-how
confidential. However, there can be no assurance that it will be successful in
these efforts.
The Company has filed to register its trademark and product names for
all of the products it intends to manufacture in the next two years.
RELIANCE UPON KEY PERSONNEL
The Company is largely dependent upon the personal efforts and
abilities of Craig E. Nash, Chairman of the Board of Directors and Chief
Executive Officer, as well as those of Scott O. Nash, Vice-Chairman of the
Board of Directors and President. Craig E. Nash and Scott O. Nash, who are
twin brothers, devote all of their time to the affairs of the Company. The
loss or unavailability of the services of any one of them may have a materially
adverse effect upon the Company. Presently, the Company has accident insurance
in the amount of $1,000,000 for Craig E. Nash and Scott O. Nash, respectively.
The Company does not have insurance for any non-accidental loss.
CONTROL BY EXISTING MANAGEMENT
As of December 31, 1995, officers and directors as a group owned
4,309,955 shares of Common Stock out of 14,290,513 shares or 30.2%, including
3,525,233 shares or 24.7% owned by Craig E. Nash and Scott O. Nash. Thus the
management of the Company, principally Craig E. Nash and Scott O. Nash, are
able to continue to control the policies and affairs of the Company.
RISKS OF THE OPTIONS AND WARRANTS
As of December 31, 1995, the Company had outstanding options to
purchase 4,185,667 shares of Common Stock, and the Warrants to purchase
1,475,563 shares of Common Stock. The existence of all of these options and
Warrants may have an adverse effect on the terms upon which the Company would
be able to obtain additional capital. Furthermore, it might be expected that
the holders of
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<PAGE> 25
all of such options and Warrants would exercise their options at a time when
the Company could obtain equity capital on terms more favorable than those
provided for by the options and Warrants. Such amounts do not include an
indeterminate number of shares of Common Stock underlying the outstanding
Series C Preferred Stock.
LIMITED MARKET FOR COMMON STOCK AND REVISIONS TO THE EMERGING COMPANY
MARKETPLACE
The Common Stock is quoted and traded on the American Stock Exchange
Emerging Company Marketplace. The American Stock Exchange recently announced
that it will no longer accept new issuers for the Emerging Company Marketplace,
but will continue trading existing issuers, including the Company. Therefore,
over time the Emerging Company Marketplace will cease to exist. The market for
the Company's Common Stock must be considered limited and there can be no
assurance that a meaningful trading market will develop. Furthermore, prices
quoted may not represent the true value of the Common Stock. Stocks sold by
the Company in private placements have generally been below the then trading
price on the American Stock Exchange.
NO DIVIDENDS LIKELY
Since its inception, the Company has had no earnings and has not paid
any dividends on its Common Stock. Payment of future dividends, if any, will
be determined by the Company's Board of Directors. In the foreseeable future,
the Company intends to retain all of its earnings to finance the development
and expansion of its business.
POTENTIAL ANTI-TAKEOVER EFFECT OF AUTHORIZED PREFERRED STOCK AND CERTIFICATE OF
INCORPORATION
The Company is authorized to issue 5,000,000 shares of $0.001 par
value Preferred Stock with the rights, preferences, privileges and restrictions
thereof to be determined by the Board of Directors of the Company. Preferred
Stock can thus be issued without the vote of the holders of Common Stock.
Rights could be granted to the holders of Preferred Stock which could reduce
the attractiveness of the Company as a potential takeover target, make the
removal of management more difficult, or adversely impact the rights of holders
of Common Stock. Except for Series C Preferred Stock, no Preferred Stock is
currently outstanding.
The Company's Certificate of Incorporation contains certain provisions
designed to require a beneficial owner of over 25% of the Common Stock to
comply with certain provisions (regarding transactions with the Company and
membership on the Board of Directors) or pay certain prices (usually the
highest price paid) for the Common Stock in certain business combinations
involving the beneficial owner. These provisions are in addition to those
provided by Delaware law and apply to Craig Nash and Scott Nash.
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<PAGE> 26
POSSIBLE REDEMPTION OF WARRANTS
The Warrants may be redeemed by the Company, in whole or in part,
under certain circumstances upon 14 days' prior notice at a price of $0.10 per
Warrant. Although the holders of such Warrants have the right to exercise
their Warrants during the 14 days prior to the date of redemption set by the
Company, a holder may be unable (for financial and other reasons) to exercise
his Warrants at the time such holder receives notice of redemption. The
Warrants will have no value except for the redemption price upon the close of
business of the date of redemption.
TRANSFER RESTRICTIONS
THE WARRANTS ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND A WARRANTHOLDER MUST CONTINUE TO BEAR THE ECONOMIC
RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD. THE WARRANTS MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF BY ANY WARRANTHOLDER UNLESS THE WARRANTS
BEING TRANSFERRED ARE REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY, REGISTRATION IS NOT REQUIRED UNDER THE ACT.
The shares underlying Warrants have been registered for resale by a
Warrantholder under the Act.
Description of Capital Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$0.001 par value, and 5,000,000 shares of $0.0001 par value Preferred Stock.
Common Stock
Subject to the preferences granted to holders of Preferred Stock, the
holders of Common Stock are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available therefore. Upon
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and any Preferred Stock liquidation preference. Each share of
Common Stock entitles the holder thereof to one vote on all matters submitted
to stockholders. The Common Stock is not subject to redemption or to liability
for further calls and is nonassessable. The holders of Common Stock have no
conversion, preemptive or other subscription rights. There is no cumulative
voting for the election of directors.
Preferred Stock
The Preferred Stock may be issued from time to time in series having
such designated rights, preferences, privileges, qualifications and limitations
that the Board of Directors may determine without stockholder approval.
Preferred Stock could be
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<PAGE> 27
given voting and conversion rights that would dilute the voting power and
equity of holders of Common Stock and could have preference over Common Stock
with respect to dividend and liquidation rights.
The Board of Directors has authorized 459 shares of Series C Preferred
Stock of which 258.8 shares are outstanding. The Series C Preferred Stock pays
no dividends, but imputes a 6% effective annual interest rate upon conversion
into Common Stock which will be accounted for over the time during which the
Preferred Stock is outstanding. The conversion rate is determined by the
acquisition value ($10,000 per share) of the Preferred Stock (plus the imputed
interest referred to above) and an 18% discount to the 5 day average market
price of the Common Stock at the time of exercise. The Series C Preferred
Stock has liquidation value over the Common Stock equal to $10,000 (plus the
imputed interest referred to above) per share. On and after July 1, 1996 the
Company can force the conversion of the outstanding Series C Preferred Stock
into Common Stock.
Miscellaneous
The Company is governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware. In general, Section 203
prohibits a public Delaware corporation from engaging in a "business
combination" which an "interested stockholder" for a period of three years
after the date of the transaction in which the period became an interested
stockholder, unless the business combination is approved in a prescribed
manner. "Business Combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
The Company's Certificate of Incorporation requires the approval of
51% of the disinterested shareholders, plus whatever vote is required by law,
for any business combination with any person or entity which directly or
indirectly beneficially owns over 25% of the voting power unless certain prices
are paid and certain actions are taken by such beneficial owner.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Securities
Transfer Corporation, Dallas, Texas.
Description of The Warrants
The Warrants were issued pursuant to agreements (the "Warrant
Agreements") between the Company and the holders of such Warrants. The
following discussion of the material terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the
Warrant Agreements.
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<PAGE> 28
Each Warrant entitles the holder to purchase at any time until their
respective expiration dates, one share of Common Stock at an exercise price of
$3.00 per share, subject to certain adjustments. The Warrants terminate
between December 1996 and April 1997. The exercise price of the Warrants and
the number of shares of Common Stock underlying such Warrants are subject to
adjustment for stock splits, stock dividends and similar events. The Warrants
do not contain anti-dilution provisions relating to issuances or sales of
Common Stock at prices below the exercise price or the then prevailing market
price of the Common Stock. The Warrants may be exercised in whole or in part.
Unless exercised (or redeemed by the Company in the manner described below),
the Warrants will automatically expire on their respective termination dates.
The Company may, at its option, redeem all or any portion of then
outstanding Warrants for $0.10 per Warrant, upon not less than 14 days' notice,
at any time after the last sale price of the Common Stock has been at least
$4.00 per share for 30 consecutive business days ending within 15 days of the
date of such notice, to the extent the holders of such Warrants have not
exercised their Warrants prior to the expiration of such 14 day period. In the
event the Company exercises its right to redeem the Warrants, such Warrants
will be exercisable until the close of business on the date fixed for
redemption in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder thereof
will be entitled only to the redemption price.
The Warrants may be exercised upon surrender of the Warrant
certificate on or prior to the expiration date at the offices of the Company,
with the exercise form of the Warrant completed and executed as indicated,
accompanied by full payment of the exercise price (by check payable to the
Company) for the number of Warrants being exercised. The Warrantholders do not
have the rights or privileges of holders of Common Stock. To tender and
exercise the Warrants pursuant to the Offer, the Letter of Transmittal is
completed instead of the exercise form on the Warrant Certificate.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrantholder exercises all Warrants then owned of record by him,
the Company will pay to such Warrantholder, if requested, in lieu of the
issuances of any fractional share which is otherwise issuable, an amount in
cash based on the market value of the Common Stock on the last trading day
prior to the exercise date.
A Warrant will be exercisable only if (i) at the time of exercise the
Company has a current prospectus effective covering shares of Common Stock
issuable upon exercise of such Warrant on an exemption from registration under
the Securities Act of 1933 is available and (ii) such shares have been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of such Warrant. The Company
-25-
<PAGE> 29
will use its best efforts to have all shares so qualified under such blue sky
or securities laws, but will not register under the Securities Act of 1933, the
Warrants or the issuance of the shares underlying the Warrants. However, the
Company has registered under such Act for resale by the Warrantholders the
shares underlying the Warrants.
THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND A WARRANTHOLDER MUST CONTINUE TO BEAR THE ECONOMIC
RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD. THE WARRANTS MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF BY ANY WARRANTHOLDER UNLESS THE WARRANTS
BEING TRANSFERRED ARE REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL,
ACCEPTABLE TO THE COMPANY, REGISTRATION IS NOT REQUIRED UNDER THE ACT.
WARRANTHOLDERS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL
RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
Available Information
To the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, the Company will provide to
each Warrantholder, the opportunity to ask questions of and receive answers
from officers and directors of the Company concerning the Company or the terms
and conditions of this Offer necessary to verify the accuracy of the
information set forth in this Offer.
Scott Hilley has been Vice President of Finance of the Company since
June 12, 1995. Mr. Hilley has over 20 years of experience in various areas of
financial management in major consumer products organizations and major money
center commercial banks. Prior to joining the Company, he served as business
controller for Goody Products, Inc. Earlier, Mr. Hilley spent over 10 years in
several key financial management positions within Nestle Foods, most notably,
business controller of United States chocolate operations. He Holds a B.S. in
Banking and Finance and Management, and an M.B.A. from New York University.
Myles Cane is no longer a director of the Company.
-26-
<PAGE> 30
EXHIBIT A
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the period from to
----- -----
Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
6780 Caballo Street 89119
Las Vegas, NV. (Zip Code)
Registrant's Telephone Number, including area code (702) 696-9300
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class: Common Name of each exchange on which registered:
AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: NONE Name of each exchange on which registered: NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the last 90 days. Yes X No
---- ----
Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this for 10-KSB. Yes X No
---- ----
State issuer's revenue for most recent fiscal year: $0
The aggregate value of the Common Stock held by non-affiliates on December 31,
1995 was $20,188,253. As of April 25, 1995 there were 12,529,691 shares of
Crown Laboratories, Inc. Common Stock $.001 par value outstanding.
<PAGE> 31
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
General
The Company is engaged in the development of, and intends to manufacture
and market, a proprietary line of pharmaceutically-balanced nutritional products
designed for the special needs of residents in nursing homes and patients in
hospitals. Generally, these individuals are over age 70, and prefer foods that
are easy to ingest, or are flavorful, or easily digestible, and nutritionally
complete. The Company's products will be provided in aseptically sealed,
flexible packages. Formulations are designed to provide a maximum in nutrient
and caloric support in easily consumable forms. The Company currently intends to
offer four liquid products and 26 dry-mixed products for use by individuals with
dietary restrictions, including low sodium diets and diabetic diets.
Additionally, calorie enhancement and nutritional supplement products will be
available.
The Company's product lines will consists of standard products for
nursing homes and specialized products such as those for kidney dysfunction and
tube feeding. Currently, the Company is in the final stages of completing a
manufacturing plant in which it will produce its products for sale. The Company
will not have any sales until such facility is complete and operational.
Crown Laboratories, Inc. anticipates it will begin manufacturing its
line of dry mix adult nutritional and specialty dietary products during the
second quarter of 1995. The major pieces of equipment necessary to manufacture
the Company's proprietary line is aseptic liquid products has been received, and
manufacturing will begin upon completion of the commissioning of the equipment.
The commissioning process is also expected to begin during the second quarter of
1995. The commissioning process could take approximately two months. The
purchased equipment has been manufactured to the United States Food and Drug
Administration ("F.D.A.") regulatory specifications for aseptic packaging and
processing equipment. Commissioning of the equipment is required by the F.D.A.
For a discussion of the funding for such manufacturing facilities, equipment and
related matters, see Item 6 "Management's Discussion and Analysis and Plan of
Operation."
The Market
The need and demand for nursing home services are increasing with the
aging of the population. The result of this longer life span is (i) an increase
in the number of persons with debilitating conditions that make it difficult to
accomplish the tasks of daily living and (ii) a restructuring of the entire
population. In relative terms, the fastest growing part of the population is
over age 85. This age group has tripled since 1960 and is expected to double
over the next 20 years.
The nursing home industry has grown to the point that, by 1993, the
U.S. spent $69.6 billion on nursing home services, representing 7.9% of total
personal healthcare dollars spent in the U.S. that year. Presently, there are
approximately 20,000 nursing homes in the United States with an average of 100
beds each. Today, the nursing home industry is a multibillion dollar business.
With one of the highest growth rates in expenditures among all health services.
A nursing home stay is a common event for the elderly population in America.
Although only 5% of the elderly reside in nursing homes at any point in time,
the lifetime risk of entering a nursing home is approximately 30%. One out of
every five individuals living past the age of 65 and one of three aged 85 or
older will spend some time in a nursing home. The median age of nursing home
residents is now 81 years.
As a result of the aging of society and changes in hospital practices,
the character of nursing homes has
<PAGE> 32
changed dramatically in the past 10 years. Nursing homes are now complex Company
institutions caring for people who, because of severe incapacities, need both
subacute and chronic care.
The costs of nursing home care are increasing faster than inflation. At
present, 65% of the cost of care is paid for by state Medicaid programs with
the remaining 35% paid for by private insurance or families. Increasingly,
insurance providers are attempting to control costs by limiting hospital
coverage, which has resulted in a 40% reduction in the length of stay at the
hospital. This encourages early transfer from acute care facilities into long
term care facilities. The result is that nursing home populations are becoming
more disabled with increasing acuity requiring a higher level of care. As care
increases, the use of pharmaceutical food supplements also increases. The
Company estimates that over fifty percent 50% of the nursing home population
receives a liquid food supplement at least two times per day.
Standard Products
The Company has developed the following products:
Liquid Products. Upon completion of its manufacturing plant, the
Company will offer a line of specialty dietary-control products in an aseptic
liquid packaged form.
WinLac(TM) -- A Complete Meal. WinLac is a lactose-free nutritional
supplement which fulfills the general supplementation requirements of long term
nursing and acute care facilities. WinLac is high in protein and lactose free,
since most elderly individuals cannot break down the sugars found in milk
products (lactose). A four-ounce serving of WinLac provides 200 calories and
approximately 20% of the United States Recommended Daily Allowance of vitamins
and minerals.
MultiCal(TM) -- A Milk-Shake Substitute. MultiCal is designed to replace
the milk shake which is a staple food product in long term and acute care health
facilities. Typically, healthcare facility kitchens make milk shakes for
patients since they contain most of the nutrients recommended by the government,
have an agreeable taste and are easy for the patient to ingest. These milk
shakes are usually made from staple ingredients in the facility kitchen.
MultiCal replaces the scratch preparation shake thus providing the healthcare
facility with a ready-to-drink, scientifically-tested formulation without
unnecessary preparation and clean up. The Company's anticipated production
efficiencies and proprietary formulation allow MultiCal to be sold to healthcare
facilities at a cost that is often less than the cost of scratch preparation
milk shakes.
Renalite(TM) -- Kidney-Deficiency Product. Renalite is specifically
designed as a food supplement for use by patients with decreased kidney
function. Decreased kidney function limits the amounts of fluids, salt and
proteins that can be consumed and eliminated. Renalite is a liquid formulation
designed as a food supplement containing high caloric intake and necessary
vitamins and minerals. Other characteristics include a restricted fluid volume
without unwanted proteins, sodium, potassium and chloride. Renalite is also
designed for consumption by diabetics, which comprise 50% of all renal
patients.
Entralite(TM) -- Tube-Feeding Products. The Company's tube-feeding
product, Entralite, will be provided in an enclosed tube feeding system
designed to give complete nutritional support to patients unable to consume
solid food by mouth. Three 500 ml. packages are designed to supply 1,600
calories plus all of the vitamins and minerals normally required for a patient.
The Company believes that doctors specify 1,500 calories for patients
approximatley 93% of the time. Entralite products will be packaged ready to
consume and administer. Entralite packages will be specially designed with an
aseptic bib fitting to facilitate attachment to the feeding tube which delivers
the product directly to the stomach.
<PAGE> 33
Dry-Mix Products. The Company has developed 26 items in dry mix form
for geriatric consumption used for protein enhancement; caloric enhancement;
restricted low sodium, sugar controlled diets; and general purpose
requirements. These dry-mix products have been test marketed and tested in
clinical studies. The Company's dry-mix nutritional products include a dry mix
protein and carbohydrate supplement, a complete instant breakfast product, a
full assortment of low sodium, sugar free items, a no-bake egg custard, a
whipped topping mix, and a texture enhanced product. These products are all
packaged in form, fill, and seal bags.
Future Product Development. Management anticipates adding new flavors
and textures to its nutrition product line. In addition, the Company
anticipates developing formulations for unique medical situations to supplement
the renal (kidney) and tube feeding applications already developed and being
developed by the Company. No assurances can be given that any planned product
will be successfully developed by the Company.
Benefit to the Patient
The Company's products have several advantages to certain patients,
specifically:
Scientifically-Formulated. The Company's formulations have been tested
under controlled situations for their particular applications. Product quality
is closely monitored in the Company's food processing laboratory. These
controls provide stable products of reliable performance that doctors may
prescribe to patients with predictable results. Such controls on consistency of
formulation and sanitation are not always possible with scratch preparations.
Taste and Variety. The Company will offer a wide variety of products
supplying distinctive tastes, texture and form (e.g., liquid or frozen, or
combined with other prepared food items). The Company believes this variety is
important to maintain the appetite of the patient.
Aseptic Preparations. All of the Company's liquid products will be
aseptically prepared and packaged. This will promote infection control.
Ready Immediately. The Company's liquid products will be packaged in
ready-to-consume four-ounce cups, with no refrigeration required. Thus, the
products will be readily available and can be stored next to patient care
stations for use whenever the patient is hungry or thirsty without unnecessary
delays in preparing a scratch beverage or meal. The Company's dry-mix products
do not require preparation.
Restricted Fluid Intake. The reduced four ounce serving size of the
Company's liquid products provides the necessary nutritional support in a
volume that is readily consumable by the patient. For renal patients, the
decreased volume allows increased nutritional intake, without increases in
fluid volume which are counter-productive to their care.
Benefit to Healthcare Facility
The Company's products have important benefits to the nursing home such
as:
Reduced Waste. The Company's liquid products will be packaged in
convenient to serve and consume four ounce packages. The Company's studies
show, in most cases, patients can consistently drink only up to four ounces of
a liquid food supplement per serving. The Company believes competitive products
are generally packaged in eight-ounce packages, thus half is usually unconsumed
and becomes waste.
Increased Nutritional Density. Since the patients using these products
cannot consume a sufficient volume of fluid to support ongoing metabolism and
maintain health, the Company's formulations are of increased nutritional
<PAGE> 34
density. The Company's four ounce liquid products, for example, contain the
same nutritional density in protein, minerals and vitamins as eight ounces of
the competitive brands.
Empirically Effective. The Company has conducted several empirical
studies in conjunction with nursing care providers. The study results
demonstrated that patients using the Company's products receive more nutrition
and gained more weight than with competing products. Patients increased their
serving intake over competitive products from 50% to 95%. The Company believes
that this increase is primarily based on two factors: the volume of the serving
is more closely matched to the patients' ability to consume these kinds of
products, and the flavorfulness of the product itself. On average, during the
studies, the patients using the Company's products gained 4.3 pounds per month,
compared to 1 pound per month with competitive products. Weight gain is
considered a key factor in determining the success of patient nutrition
programs.
Cost. The cost of MultiCal is often less than that of scratch
preparations. However, MultiCal will be ready to serve and will be prepared in
four ounce individually portioned packages, thus avoiding the frequent wastage
found in scratch preparations. In addition, the Company's products will be
normally consumed directly from the four ounce disposable cup in which they
will be packaged, thus eliminating the need for washing, rinsing, drying and
storing additional serving containers.
Refrigeration. Government regulations, requiring scratch preparation
milk-based products to be carefully refrigerated, are closely monitored and
strictly enforced by the various regulatory agencies. Failure to follow proper
temperature requirements can result in the imposition of penalties to the
facility. The Company's products will be stored in aseptically sealed
containers that require no refrigeration either for storage or prior to serving.
Packaging. The Company's containers will be light-weight cups which
stack efficiently; and they will be made of a layered plastic (not glass) so
that shipping boxes are light weight.
Marketing Strategy
Unlike the Company's primary competitors (Ross Laboratories, Inc. and
Mead Johnson Nutritionals, who together control approximately 93% of the
market), the Company will continue to focus on the nursing home (and not the
acute hospital care) segment of the pharmaceutical nutrition market.
Management believes that by focusing on the needs of the nursing home niche
with its product formulations, packaging and marketing approach, the Company
can gain significant market share since the Company's competitors are not
focused on this segment. In marketing, the Company intends to implement the
following strategies:
Clinical Studies. For qualified nursing home clients, the Company has
offered to do clinical studies in the nursing home facilities using the
Company's products. Typically, a clinical study lasts approximately three
weeks, wherein a Company representative provides the Company's products to a
controlled segment of the nursing home population. Over the period of study,
the eating habits and health records of those patients who are given access to
the Company's products and those using competitive products are compared. Each
study may be different depending upon the objectives of the nursing home
dietitian, but typically the study will monitor such factors as (i) total
intake of solids and liquids; (ii) total intake of carbohydrates, fats, and
proteins; (iii) total intake of vitamins and minerals; (iv) interference of the
Company's products with the attractiveness of other foods; (v) bowel habits;
and (vi) weight gain.
Distributors. The Company intends to focus its marketing effort on
nursing home chains, rather than small, individual nursing homes. Upon selling
to a chain account, the Company plans to establish a relationship with
<PAGE> 35
an institutional food distributor to supply that chain account on all ongoing
basis. The Company will typically contract with distributors who specialize in
institutional food supplies (for nursing homes, schools, churches, hotels,
governments and feeding programs for third-world countries), as they are
already actively supplying (both large and small) nursing homes. These
institutional distributors will hopefully favor the Company's products because
(i) the nursing home environment generates constant sales throughout the year
(unlike schools and hotels which are seasonal); (ii) the Company's products do
not require refrigeration and are shelf stable; (iii) the Company's products
take up little space in the warehouse and delivery trucks due to their unique
packaging (light-weight plastic cups rather than glass); and (iv) the Company's
products have higher revenue and margin potential than other food products. The
Company's principal competitors (Ross Laboratories and Mead Johnson
Nutritionals) have focused on hospital supply, not food distributors. Thus, the
Company believes that the competition is using a higher cost method of
distribution and is missing distribution opportunities to many long-term
nursing care facilities. There can be no assurance that the Company's
distribution efforts will be successful or that the Company's competitors will
not engage in similar distribution efforts.
Customers. The Company, with the completion of its manufacturing plant
(See Item 2 "Description of Property") will aggressively market its line of
liquid and dry mix products to individual nursing homes, nursing home chains
and hospital groups. Management and its consultants have contact with companies
comprising over 2,000 acute and long term care facilities.
On September 21, 1990, the Company entered into a letter of intent for
a five year purchase agreement with National Medical Enterprises (NME), which
was subsequently renewed through December 1997. In addition to continued
executive level interest and support at NME, the agreement is to provide the
Company access to NME's extensive national purchasing agreements through
placement of the Company's products in NME's official order guides and access
to its distribution network. NME and its affiliate, Hillhaven Corporation,
represent over 272 acute care and specialty hospitals and 345 nursing homes.
NME and its affiliates are to be participants in these purchasing agreements.
COMPETITION
The pharmaceutical nutritional product industry's annual revenue is
approximately $4 billion in the United States alone. Three companies currently
dominate this market; Ross laboratories, Inc. (a division of Abbott
Laboratories, Inc. (NYSE)), Mead Johnson Nutritionals (a division of
Bristol-Meyers-Squibb, Inc. (NYSE)), and Sandoz Nutrition (a division of Sandoz
Pharmaceuticals, Inc). Clintec (a division of Nestle Foods) competes with tube
feeding products.
All of such companies are larger and better financed than the Company,
have established products and an established customer base, and can accordingly
devote more resources to research and development, production, and marketing
activities. Further, these companies may respond vigorously to the Company's
entry into the market by targeting products to nursing homes or repacking their
product line. Therefore, the Company may not be a significant factor in these
markets in the near or foreseeable future.
MANUFACTURING
Manufacturing of dry mix products entails the purchasing of raw
materials such as sugar and milk, preparing the dry materials, mixing, blending,
and finally packaging. The Company will check its products for quality and
moisture content at its own laboratory facilities. The dry mix packaging
process involves using preprinted paper foil run through a special
form-fill-seal machine that makes the envelope, fills it and seals it for
shipment.
<PAGE> 36
The liquid packaging process is more complex and has required the
establishment of a liquid processing facility. The Company has acquired and
received the major components for the completion of this facility in Las Vegas,
Nevada (See Item 2 -- "Description of Property").
In manufacturing liquid products, water is tested and batched prior to
use, the assure the proper chemical balance. The water and Company-formulated
powdered premix are mixed in a batch tank and heated to a predetermined
temperature. A high oleic safflower oil, flavors and coloring are blended with
the mixture. The liquid is then passed to a chiller and held for processing.
During processing, the product is then passed through a pasteurization process
to sterilize it immediately prior to packaging in the four-ounce aseptic cups.
LACK OF PRODUCT PROTECTION
The Company regards the formulation of its products to be proprietary,
but presently it has no patent or other protective rights. The Company is
studying and evaluating the need and costs associated with patents and other
protective rights. Currently, the Company exerts substantial efforts to protect
trade secrets and to keep formulas and related process know-how confidential.
However, there can be no assurance that it will be successful in these efforts.
The Company has filed to register its trademark.
REGULATORY COMPLIANCE AND APPROVALS REQUIRED FOR OPERATIONS
The Company's operations are regulated principally by the United States
Department of Agriculture ("U.S.D.A.") and the F.D.A., although state and local
regulations also apply. Failure to comply with regulatory requirements could
result in fines and other penalties, including cessation of production.
Additionally, there can be no assurance that regulatory requirements will not
change or that the Company will be able to comply with changes, if they occur,
at an acceptable cost.
Regulatory approval by the F.D.A. is required for the manufacturing
process, which principally entails certification of the processor, and the
aseptic filling and packaging machine. The manufacturers assure the Company
their equipment will meet applicable F.D.A. regulations. The manufacturer of
the processor has numerous processors approved in the United States. The filler
manufacturer has never received approval in the United States because this type
of filler is the first made by them for a United States manufacturer. There can
be no assurance that these two pieces of equipment will be approved by the
F.D.A. Failure to meet regulatory approval will result in the Company's
inability to manufacture and ship its products.
The costs associated with meeting environmental requirements are
minimal. The Company estimates that approximately $25,000 in equipment is
necessary to filter by-products. The Company does not anticipate any other
costs associated with environmental issues other than routine maintenance of the
above equipment.
RESEARCH AND DEVELOPMENT
Approximately $80,000 per year for the last two years has been spent on
continued product development. The main focus has been to prepare Renalite and
MultiCal for mass production.
SOURCES OF SUPPLY
There is an abundant supply of raw material necessary for
manufacturing. The Company considers the sources and names of its principal
suppliers confidential.
<PAGE> 37
Employees
Currently, there are no labor contracts with the Company. The Company
currently employs 16 full-time employees.
Organization
Crown Laboratories, Inc. (the "Company") was incorporated on February
23, 1989, in Delaware, as Industrialistics, Inc. In April 1989, Roe
Pharmaceutical Company ("Roe") acquired 95% of the outstanding shares of Common
Stock of Industrialistics, Inc. In September 1991, Roe exchanged all of its
shares of Common Stock of Industrialistics, Inc. for all of the outstanding
shares of Common Stock of Roe. In November 1991, Industrialistics, Inc. changed
its name to Crown Laboratories, Inc. Roe was dissolved in October 1993.
Item 2: DESCRIPTION OF PROPERTY
In September 1994, the Company entered into a five year lease of a
62,000 square foot facility in Las Vegas, Nevada. The Company is currently
completing tenant improvements so that the plant can be commissioned by the
U.S.D.A. and the F.D.A. The facility includes approximately 5,000 square feet
of office facilities. The lease provides for monthly payments of $25,080 for
the first year, followed by scheduled increases based upon a cost of living and
property tax increase based upon cost of living and property tax adjustment.
The Company has received its major manufacturing equipment and has
spent $5.2 million on equipment acquisition, of which $3.5 million is in
deposits and cash outlay. It has also spent $1,281,000 on leasehold
improvements for offices and upgrading the production area to meet minimum
standards required for manufacturing. The Company has received lease financing
from G.E. Capital for its processor in the amount of $514,000 to be repaid over
five years. Standard Chartered Bank has agreed to finance $1,000,000 of the
cost of the Company's aseptic filling and packaging equipment; repayment will
be over an 18 month period. The monthly loan payments will begin sixty days
after the Company receives F.D.A. approval for the filler. The telephone
equipment, computer equipment, and manufacturing software have been financed by
the respective suppliers on a 36 month basis. The Company has received
financing from First Security Bank and the Small Business Administration in the
amount of $1,250,000 which has been used for equipment acquisition. No
assurances can be given as to whether or not the Company will be able to
continue to obtain lease or equipment financing on a basis favorable to the
Company.
While no assurances can be given, Crown Laboratories, Inc. anticipates
it will manufacture its line of dry mix adult nutritional and specialty dietary
products during the second quarter of 1995. The major pieces of equipment
necessary to manufacture the Company's proprietary line of aseptic liquid
products have been received, and manufacturing will begin upon completion of
the commissioning of the equipment. The commissioning process is also expected
to begin during the second quarter of 1995. Prior estimates of December 1994
were rescheduled since the manufacturer was behind in their delivery of the
aseptic filling and packaging machine. The commissioning process could take
approximately two months. The purchased equipment has been manufactured to the
F.D.A. regulatory specifications for aseptic packaging and processing
equipment. Commissioning of the equipment is required by the F.D.A.
The Company is studying both the feasibility and financing of
constructing an additional manufacturing facility in Puerto Rico. This facility
would be much smaller and would be responsible for all dry blending. Raw
materials and labor are less expensive in Puerto Rico than in Las Vegas,
Nevada, resulting in a lower cost of manufacturing. The Company would be
eligible for employee tax credits and grants from the Puerto Rican government
to cover moving costs and leasehold improvements. In order to qualify for these
tax credits, the
<PAGE> 38
Company has arranged for the incorporation of a subsidiary in Puerto Rico,
which has not been capitalized, and would attempt to raise up to $6 million in
such subsidiary on terms and conditions acceptable to the Company. One
possibility being considered is that the Company would issue shares of
convertible preferred stock. Through December 31, 1994, the Company had
incurred and expensed $49,018 relating to these efforts.
Item 3: LEGAL PROCEEDINGS
The Company has been subject to routine business litigation. Currently,
the Company has three matters pending which the Company clues not consider to
be routine:
Crown v. Swinney et al, was filed by the Company in March 1994, in the
District for the State of Nevada, concerning the attempt of a shareholder, Mr.
Zananiri, to sell unregistered securities of the Company by public sale. The
Company has obtained a temporary restraining order preventing the sale which has
been in effect since March 1994. A hearing has been held, and this matter is
currently pending decision of the Court. The Company believes that it will
prevail in this matter and the liability of the Company, if any, would be
limited to attorney's fees for the defendant.
Zananiri v. Crown et al, was a lawsuit filed by Mr. Zananiri in April
1994 in California Superior Court alleging fraud and "alter ego" arising from a
debt of Roe Pharmaceutical Co., a discontinued subsidiary of the Company, which
was personally guaranteed by Craig Nash. The Company filed a Motion for Summary
Judgment, since the underlying debt has been fully satisfied by Mr. Nash. On
April 20, 1995, Mr. Zananiri dismissed the lawsuit without prejudice. The
Company is filing a motion to recover its legal fees in this matter.
Crown v. Antretter et al, was filed in Federal District Court in the
State of Nevada by the Company in November 1994 seeking an injunction and
damages concerning the disclosure of non public material information,
misinformation and omission of material fact by Mr. Antretter, a former director
and former investment banker of the Company, selectively to his clients and
broker dealers. These communications were not authorized by the Company, and
were in direct violation of the agreements Mr. Antretter has with the Company.
The Company's request for a temporary injunction was denied. However, the Court
reserved the right to reconsider a preliminary injunction if Mr. Antretter
continued to breach his agreement or made any other disclosures. Mr. Antretter
filed a Motion to Dismiss, which on March 10, 1995, the Court dismissed and
treated as a Motion to Amend. Crown has filed an amended complaint to further
support its allegations and quantify its damages. Mr. Antretter has subsequently
filed another Motion to Dismiss. The Company believes that it will prevail on
the merits.
Other Legal Matters
John D. Kaweske is associated with R.K. Grace & Company, the current
investment banker for the Company. He is also the former partner of John
Antretter, the former investment banker for the Company. John D. Kaweske has
informed the Company that his father, John J. Kaweske, has been sued by the
Securities and Exchange Commission. The suit alleges that there has been a
civil violation of the securities laws regarding commissions paid by the
Company directly to John Antretter, pursuant to an agreement the Company had
with John Antretter, for an investment made by funds managed by John J.
Kaweske. The Securities and Exchange Commission has requested and received full
documentation from the Company regarding the payment of the commissions to Mr.
Antretter. The Company's records reflect that Mr. Antretter was paid
commissions in full for all investments received from the funds managed by John
J. Kaweske.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 39
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock was listed on the American Stock Exchange, Emerging
Company Marketplace on March 29, 1994. It trades under the symbol CLL.cc. Prior
to that time, the Company's stock was listed on the Electronic Bulletin Board
(EBB) of the NASDAQ. The table below lists the low and high bid price of the
stock for each quarter over the last two years:
<TABLE>
<CAPTION>
Calendar 1994 Calendar 1993
------------- -------------
<S> <C> <C> <C> <C>
1st Quarter (EBB through 3/31/94) $5.00 $5.50 $5.47 $5.47
2nd Quarter (Amex ECM) $1.50 $4.63 $5.00 $6.25
3rd Quarter (Amex ECM) $1.50 $2.19 $5.25 $5.95
4th Quarter (Amex ECM) $1.88 $3.06 $5.00 $5.25
</TABLE>
The source of the above information comes from the American Stock
Exchange for Amex quotes and the National Quotation Bureau, Inc. for EBB
quotes. Such EBB quotations reflect inter-dealer prices, without retail
mark-up, markdown or commissions, and may not reflect actual transactions.
Trading in the Common Stock has been limited and the above quotations
may not represent the true value of the Common Stock.
There are approximately 720 Common Stock holders. The Company did not
pay any dividends in the last two years and does not intend to pay dividends in
the foreseeable future. All available working capital will be used to meet the
Company's expected growth.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Results of Operation
The Company has been in research and development and early marketing
phases. For the year ending December 31, 1994, it had no sales and incurred
losses of ($1,569,980). For the year ending December 31, 1993, the Company had
no sales and incurred losses of ($660,964), which included a writeoff of an
additional $265,341 for fund raising costs and $153,261 of income associated
with the reversal of liabilities of a liquidated subsidiary. After adjusting
for these one time items, the Company's loss amounted to ($548,884). The
continued losses have resulted primarily from employee wages, plant start-up,
and funding costs, none of which have been capitalized as fixed assets.
Management's efforts have been directed toward the commissioning and start up
of its manufacturing facility in Las Vegas. (See Item 2 -- "Description of
Property").
<PAGE> 40
Plan of Operation
The Company will not commence any sales of its liquid or dry mixed
products until after its manufacturing plant has been completed and approved by
the F.D.A. and U.S.D.A., as applicable. Currently, the Company is seeking to
finalize all the required leases and equipment financing for its manufacturing
facility, and expects to be commissioning this manufacturing facility in the
second quarter of 1995. Manufacturing should commence after the completion of
the commissioning process which could take approximately two months.
Manufacturing of dry-mix products should commence during the second quarter of
1995.
The plant is nearing completion and the Company has begun its marketing
efforts.
Liquidity and Capital Resources
At December 31, 1994 the Company had working capital of $1,354,684.
Since that time, the Company has continued to incur losses. Following a private
placement of equity securities in 1993, which raised net proceeds of
$4,560,000, the Company concluded a private placement of its securities in
November 1994, which was sold in units of $50,000 for 25,000 shares of Common
Stock and warrants to purchase 12,500 shares of Common Stock for $3 per share.
The gross proceeds from the Private Placement were $3,505,000 of which
$3,100,000 was received by the Company; the balance was delivered to certain
selling shareholders. In the Private Placement, the Company issued 1,547,975
shares of Common Stock and warrants to acquire up to 877,500 shares of the
Company's Common Stock at an exercise price of $3 per share. The Company has
the right to call such warrants at a call price of $0.10 per warrant, if at any
time the current market price of the Company's Common Stock has been at least
$4.00 per share for 30 consecutive days, ending within 15 days of the notice of
such call. All unexercised and uncalled warrants will expire on November 30,
1996. The Company also issued to the Placement Agent and brokers in the Private
Placement warrants to acquire 165,750 shares of the Company's Common Stock at
an Exercise price of $2.40 per share. These warrants will expire in November
1999.
The Company is currently seeking to raise up to $2.2 million (44 Units)
in additional equity financing through another private placement (the "Second
Private Placement"). The terms and conditions of the Second Private Placement
are similar to the terms and conditions of the recently concluded Private
Placement. Between January 1 and April 25, 1995, $1,377,500 has been raised
from the Second Private Placement. At the Company's option and discretion, it
may increase the amount to be raised in the Second Private Placement, close the
Second Private Placement, or extend the Second Private Placement. There can be
no assurances that the Company will be able to successfully complete the Second
Private Placement or, if completed, that the Company would not require
additional funds at a later date, which would involve dilution to the Company's
existing shareholders.
In each of the recent private placements, the securities were not
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from such
registration.
The Company is dependent on the commissioning and start up of its
manufacturing plant in Las Vegas to continue in
<PAGE> 41
The Company is dependent on the commissioning and start up of its
manufacturing plant in Las Vegas to continue in existence and expand
operations. The Company believes, based upon the current anticipated
commissioning date, the existing funds, funds to be raised in the Second
Private Placement, and existing and proposed leases and equipment financing
will allow it to complete its manufacturing facility. These funds, together
with revenues from all other sources, including future operating revenues, will
satisfy the Company's operating cash requirements for 1995. No assurance can
be given as to when additional working capital will be required, or that
additional working capital can be obtained, or, if obtainable, that the terms
will be satisfactory to the Company, or that obtaining such working capital
would not result in substantial dilution of stockholder's interests.
Item 7: FINANCIAL STATEMENTS
See the audited financial statements for the years ended December 31,
1994 and 1993.
Item 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes or disagreements with the Accountants for the
period ending 1994. In October 1993, the Company changed its independent
public accounts to Arthur Andersen LLP. There were no disagreements with the
prior independent public accountant who resigned to become the Company's Chief
Financial Officer.
<PAGE> 42
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The current directors and executive officers of the Company as are
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Craig E. Nash 40 Chairman of the Board of Directors and
Chief Executive Officer
Scott O. Nash 40 President and Vice Chairman of the Board of
Directors
Christopher Demetree 31 National Account Executive and Director
Myles Cane 64 Director, Chairman of the Compensation
Committee
Member of the Audit Committee
Lee Allen Hooker 49 Director, Member of the Compensation
Committee
Arthur M. Berkowitz 54 Director, Chairman of the Audit Committee
Member of the Compensation Committee
Linda Carrick 41 Director, Member of the Audit Committee
Michael Tom 40 Chief Financial Officer
</TABLE>
Mr. Craig E. Nash has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since September 1991 and has held such
positions or similar positions in its predecessors since February 1980. He also
is the senior marketing executive of the Company. Mr. Nash has been fifteen
years experience in pharmaceutical and food-products marketing. Mr. Nash
attended the University of Southern California.
Mr. Scott O. Nash has been President and Vice Chairman of the Board of
Directors of the Comany since September 1991 and has held these or similar
positions in its predecessors since February, 1980. Mr. Nash has fifteen years
experience in pharmaceutical and food-products manufacturing and operations.
Mr. Nash attended the University of Southern California. Messrs. Craig and
Scott Nash are twin brothers.
Chris Demetree has been a director of the Company since December 2,
1992 and prior to that a major investor in the Company. Mr. Demetree is
currently the National Accounts Executive for Crown and prior to that was Vice
President of Demetree Brothers, Inc., a Florida-based fully integrated property
management and investment company, and was responsible for many aspects of the
management of Demetree Brothers, Inc. His duties primarily included planning
and developing
<PAGE> 43
real estate developments, including permits, sales pro formas and construction
budgets. Mr. Demetree holds a B.S. degree in Industrial Management from Georgia
Institute of Technology.
Myles Cane became a director of the Company in February 1994. Mr. Cane
is of Counsel with the law firm of Marcus Montgomery Wolfson and Burten P.C. of
New York, New York. Mr. Cane has practiced law in various capacities for 38
years. He has a wide area of business experience and currently is or has been
a member of the Board of Directors of several public and private corporations,
and a member of the Boards of Directors of many not-for-profit corporations and
foundations. He is, and for the last three years has served as, Chairman of
the Board of Skidmore College in Saratoga Springs, New York. Mr. Cane attended
Rutgers University until admission into law school at the University of
Virginia where he received his LL.B.
Lee Allen Hooker became a director of the Company in February 1994.
Mr. Hooker is the owner and Chief Executive Officer of American Benefits
Counselors/Hooker Associates, a brokerage firm for employee benefits to the
healthcare industry. He has been involved with the medical industry for more
than twenty-five years. Mr. Hooker holds a B.S. in Business Administration
from Columbia Union College and an M.S. in Business Administration from
Pepperdine University.
Arthur M. Berkowitz became a director of the Company in June 1994. Mr.
Berkowitz has been an agent for the Equitable Life Insurance Society of the
United States for the past 17 years. He is currently a Benefits Consultant to
many large corporations. Mr. Berkowitz was an engineer with The General
Electric Company for 12 years. Mr. Berkowitz is a life member of the Million
Dollar Round Table, a Director of the Philadelphia Friends of ALS, and
comptroller of the Germantown Jewish Centre of Philadelphia. Mr. Berkowitz has
a B.S. degree in Mathematics from St. Lawrence University and a B.Ae. and M.Ae.
in Aeronautical Engineering from Rensselaer Polytechnic Institute.
Linda Carrick became a director of the Company in June 1994. Ms.
Carrick has been in the nursing field since 1975. She has been Clinical
Director, Surgical Nursing for the Hospital of the University of Pennsylvania,
where she also served as interim Vice President of Nursing. She is a member of
several professional organizations, including the American Association of
Critical Care Nursing, the Nursing Association, Association of Nurse
Executives, and the American Society of Parenteral and Enteral Nutrition. She
has also completed a Wharton Nurse Executive Fellowship. Ms. Carrick holds a
B.S. degree in Nursng from Villanova University, and a M.S. degree in Surgical,
Cardiovascular Nursing from The University of Pennsylvania, where she is a
candidate for a Ph.D. in Healthcare Administration for completion in May 1995.
Michael Tom has been the Controller of the Company since June 1993 and
the Chief Financial Officer of the Company since June 1994. Prior to that he
was an independent public accountant in private practice, of which Crown and its
former subsidiaries had been clients from their inception to June 1993. Mr.
Tom has been a licensed Certified Public Accoountant for 16 years and was in
private practice for 10 years. Prior to that he worked as a staff accountant
for a number of firms and auditor for asset based lenders. Mr. Tom holds a
B.S. degree in Accounting from San Diego State University and is a registered
accountant in the State of California, and a licensed Certified Public
Accountant.
All Directors hold office until the next annual meeting of the
shareholders and the election and qualification of their successors. Officers
are elected annually and serve at the pleasure of the Board of Directors.
<PAGE> 44
Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and any persons who own more than ten percent
of the registered class of the Company's equity securities to file various
reports with the Securities Exchange Commission and the American Stock Exchange
concerning the holdings of and transactions in the common stock and other
equity securities of the Company. Copies of these filings must be furnished to
the Company. Based on the review of the copies of such forms furnished to the
Company, and written representations from the Company's directors and executive
officers, the Company does not believe that any such forms were not timely
filed for 1994.
Item 10. EXECUTIVE COMPENSATION
No executive officer of the Company accrued remuneration in excess of
$100,000 during 1994. The following table shows all remuneration accrued by
the Chief Executive Officer and President during the fiscal years ended
December 31, 1992, 1993, and 1994 for services in all capacities rendered to
the Company and its subsidiaries.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------- -------------------------
Awards
------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Position Salary Compensation(5) Award Options
- ------------------ ------ --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Craig Nash 1994 $66,329 $0 $0 0
Chief Exec. Officer 1993 24,904(1) 0 0(1) 768,028
1992 12,924(2) 0 0 24,000
Scott Nash 1994 57,223 0 0 0
President 1993 28,735(3) 0 0(2) 768,029
1992 14,093(4) 0 0 16,000
</TABLE>
(1) Includes 2,056,462 shares granted under Mr. Craig Nash's employment
agreement with a nominal fair market value on the date of the employment
agreement. All Common Stock issued to Craig Nash and Scott Nash were
ascribed a nominal value by the Company and its investment adviser given
the inherent uncertainty as to the ability of the Company to raise capital
and continue in existence as of the dates such shares were issued. An
additional 30,000 shares were also granted with a nominal fair market value
at the date of grant and a fair market value of $86,250 at December 31,
1994 and such 30,000 shares vest 10,000 shares each on January 3, 1995,
1996 and 1997. All the shares are eligible to receive dividends.
(2) Includes 19,805 shares granted in lieu of compensation with a nominal fair
market value on the date of grant.
(3) Includes 2,056,462 shares granted under Mr. Scott Nash's employment
agreement with a nominal fair market value on the date of the employment
agreement. An additional 30,000 shares were also granted with a nominal
fair market value at the date of grant and a fair market value of $86,250
at December 31, 1994 and such 30,000 shares vest 10,000 shares each on
January 3, 1995, 1996 and 1997. All the shares are eligible to receive
dividends.
<PAGE> 45
(4) Includes 115,200 shares granted in lieu of compensation at a nominal
fair market value on the date of grant.
(5) The Company provided automobile allowances to certain of its employees,
including certain persons who are executive officers of the
Company, based upon the job requirements of each employee. No amounts
with respect to the personal use of automobiles, if any, have been
included in the above table. The Company has concluded that the
aggregate amounts of such personal benefits which cannot be
specifically or precisely ascertained, did not in any event exceed, as
to any executive officer, either the lesser of $50,000 or 10% of his
cash compensation for the last fiscal year, and that the information
set forth in the foregoing table is not rendered materially misleading
by virtue of the omission of the value of such personal benefits.
The Company has established a bonus pool, whereby 10% of pre-tax
profits will be made available to employees, with Craig Nash and Scott Nash in
the aggregate being entitled to 50% of the bonus pool. The remainder of the
pool will be allocated at the discretion of the Chief Executive Officer. Given
that the Company has not yet generated pre-tax profits, no bonuses have been
paid.
In January 1993, the Company entered into five year employment
agreements with Craig Nash and Scott Nash. They are currently receiving base
salaries of $60,000 per annum, although such amounts may be increased at the
discretion of the Board of Directors. The Company can terminate each such
employment for cause on 90 days notice. If the individual is so terminated by
the Company during the term of the employment agreement, he will receive
certain termination compensation of up to two years of base salary and the
immediate vesting of the stock per their respective employment agreements.
Each of the executive officers and certain key employees have entered
into a Confidentiality Agreement in which the individual agrees not to
disclose, reveal or permit access to all or any portion of the "Confidential
Information" as specified in the agreement.
All other members of the Board of Directors, Myles Cane, Lee Allen
Hooker, Arthur M. Berkowitz, and Linda Carrick, each received options to
purchase 50,000 shares of common stock at exercise prices ranging from $1.275
to $1.38 per share. Of the options received, options to purchase 25,000 shares
of common stock vested immediately and options to purchase 25,000 shares of
common stock will vest on different schedules ranging between the thirteenth to
the twenty-third month of their term.
The following table gives certain information regarding options held
on December 31, 1994.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The
Unexercised Options at FY-End Money Options at FY-End
------------------------------- ---------------------------
Name of Individual Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Craig Nash, CEO 768,028 - $472,337 -
Scott Nash, President 768,029 - $472,338 -
</TABLE>
No options were granted to or exercised by Craig Nash or Scott Nash
during 1994.
<PAGE> 46
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDF MANAGEMENT
The following table sets forth certain information as of April 25, 1995
with respect to the beneficial ownership of the Company's Common Stock by all
persons known by the Company to be the beneficial owners of more than 5% of any
such outstanding classes, and by each director, and by all executive officers
and directors as a group.
<TABLE>
<CAPTION>
Name Shares Held Percentage
- ---- ----------- ----------
<S> <C> <C>
Craig Nash 2,635,014 15.31%
Scott Nash 2,656,276 15.43%
Michael Tom 240,500 1.40%
Chris Demetree 644,075 3.74%
Myles Cane 60,000 .35%
Lee Allen Hooker 91,478 .53%
Arthur M. Berkowitz 159,929 .93%
Linda Carrick 72,750 .42%
Invesco North American Holdings 1,546,750 8.99%
All Executive Officers and
Directors as a Group 6,560,022 38.11%
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CRAIG AND SCOTT NASH
Through the date of liquidation and dissolution of Roe Pharmaceuticals,
Inc. ("Rose") in October 1993, the consolidated financial statements of Crown
included net liabilities of Roe of $238,261. Of this amount, net liabilities
of $85,000 were assumed by Messrs. Craig Nash and Scott Nash prior to
dissolution in return for the issuance to each of 90,023 shares of common stock
of Roe.
In 1993, Craig Nash and Scott Nash borrowed $21,000 and $8,500,
respectively, from the Company and repaid such amounts in March 1994 by
transferring shares of the Company's common stock valued at $1.50 per share.
As of December 31, 1994, the Company had advanced funds to Craig Nash and Scott
Nash. These advances were repaid by a one time salary increase granted to
Craig Nash and Scott Nash of $15,000 and $5,000, respectively.
Craig Nash and Scott Nash also guarantee certain indebtedness of the
Company and have pledged a total of 500,000 shares of common stock of the
Company to secure such guarantee. If the lender seizes such shares as a result
of a default by the Company, the Company has agreed to replace such shares.
19
<PAGE> 47
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (All previous filings on Form SB-2 have the same exhibit
number and are incorporated by reference, See File No. 33-27602)
3(c) Certificate of Incorporation, as amended (1)
3(b) Bylaws, as amended (1)
4(a) Form of Warrant Agreement, including Form of Warrant, for private
placement investors (1)
4(c) Specimen of Common Stock Certificate of Registrant (2)
10(a) 1992 Stock Option Plan (8)*
10(b) Employment Agreement with Craig Nash (3)*
10(c) Employment Agreement with Scott Nash (3)*
10(d) Employment Agreement with Christopher Demetree (3)*
10(e) Employment Agreement with Lillie Thomas (3)*
10(f) Employment Agreement with Lawrence Loman (3)*
10(g) Employment Agreement with Michael Tom (3)*
10(h) Lease for Las Vegas, Nevada (2)
10(i) Proposal with General Electric Corporation (2)
10(j) Agreement with NME (2)
10(k) Agreements with COHr/Purchase Connection (2)
10(l) First Security Bank Loan Commitment (6)
10(m) Employment Agreement with Brent Coeur-Barron (7)*
10(n) Consulting Agreement (7)
10(o) Consulting Agreement with Microcap Consulting and Communications (7)
10(p) SBA Loan Commitment (7)
10(q) R.K. Grace & Company Investment Banking Agreement (7)
22 Subsidiaries: None
(c) Form 8(K) filed pursuant to Rule 135(c) March 9, 1995
* Management Compensation Contract or Plan
(1) Filed herewith
(2) Previously filed in connection with the Registrant's Registration
Statement on Form SB-2, File No. 33-72912.
(3) Previously filed as an exhibit to the Form 10-KSB for the fiscal year
ended December 31, 1992.
(6) Previously filed as an exhibit to the Form 10-KSB for the fiscal year
ended June 30, 1994.
(7) Previously filed as an exhibit to the Form 10-KSB for the fiscal year
ended December 31, 1994.
(8) Previously filed as an exhibit to the Form 8-K of the Registrant filed
September 24, 1991.
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN LABORATORIES, INC.
Date: April 29, 1995 By: Craig E. Nash
----------------------------------
Craig E. Nash
Chief Executive Officer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Craig E. Nash Chairman of the Board Directors April 29, 1995
- ---------------------------------- Chief Executive Officer
Craig E. Nash (Principal Executive Officer)
Scott O. Nash Vice Chairman of the Board of Directors April 29, 1995
- ---------------------------------- President
Scott O. Nash
Michael Tom Chief Financial Officer April 29, 1995
- ---------------------------------- (Principal Accounting Officer)
Michael Tom
Director April , 1995
- ----------------------------------
Christopher Demetree
Myles Cane Director April 29, 1995
- ----------------------------------
Myles Cane
Director April , 1995
- ----------------------------------
Lee Allen Hooker
Arthur M. Berkowitz Director April 29, 1995
- ----------------------------------
Arthur M. Berkowitz
Director April , 1995
- ----------------------------------
Linda Carrick
</TABLE>
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Crown Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Crown
Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The Company and its predecessors have been engaged in the sale of proprietary
medical nutritional dry-mix and liquid products. However, for the past two
years, the Company has been engaged in constructing its own manufacturing
facility and had no sales. Note 1 to the consolidated financial statements
contains a description of the Company's expectations about future operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crown Laboratories, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 28, 1995
F1
<PAGE> 50
CROWN LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,826,935 $2,827,412
Employee and officer advances 5,445 30,550
Inventory 1,588 9,047
Prepaid expenses 62,866 --
---------- ----------
Total current assets 1,896,834 2,867,009
PROPERTY AND EQUIPMENT
Leashold improvements 886,424 12,500
Equipment 2,418,946 37,152
---------- ----------
3,305,370 49,652
Accumulated Depreciation (38,284) (28,852)
---------- ----------
Net Property and Equipment 3,269,086 20,800
DEPOSITS 899,124 991,858
---------- ----------
Total assets $6,065,044 $3,879,667
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term and capital lease liabilities $ 298,320 $ --
Accounts payable and accrued expenses 243,830 207,477
Loans payable -- 110,000
---------- ----------
Total current liabilities 542,150 317,477
LONG-TERM DEBT & CAPITAL LEASE LIABLITIES 813,431 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - $0.001 par value; 5,000,000
shares authorized; none outstanding
Common Stock - $0.001 par value;
50,000,000 shares authorized; 11,840,941
and 10,081,384 shares outstanding in 1994
and 1993, respectively 11,841 10,081
Additional paid-in capital 8,653,500 5,938,007
Accumulated deficit (3,955,878) (2,385,898)
---------- ----------
Total shareholders' equity 4,709,463 3,562,190
---------- ----------
Total liabilities and shareholders' equity $6,065,044 $3,879,667
========== ==========
</TABLE>
F2
<PAGE> 51
CROWN LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1995
----------- ---------
<S> <C> <C>
SALES - -
COST OF SALES - -
GENERAL AND ADMINISTRATIVE EXPENSES 1,600,943 539,571
----------- ---------
Loss from operations (1,600,943) (539,571)
OTHER INCOME (EXPENSE)
Write off of unsuccessful fundraising
related costs - (265,341)
Interest expense (41,039) (40,392)
Rental income 25,800
Interest income 46,202 31,079
Reversal of net liabilities of liquidated
subsidiary (note 2) - 153,261
----------- ---------
Loss before income taxes (1,569,979) (660,964)
INCOME TAX PROVISION - -
----------- ---------
NET LOSS ($1,569,979) ($660,964)
=========== =========
NET LOSS PER SHARE ($0.15) ($0.09)
=========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,492,664 7,581,200
=========== =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
F3
<PAGE> 52
CROWN LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Shares of Additional Paid- Accumulated
Common Stock Common Stock in Capital Deficit Total
------------ ------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Dec. 31, 1993 10,081,384 $10,081 $5,938,007 ($2,385,898) $ 3,562,190
Option shares issued to key
employees for employment
agreements 6,000 6 (6) - -
Option shares issued to
merchants for services rendered 196,439 196 48,675 - 48,871
Repurchase and cancellation of
shares received from Craig Nash
and Scott Nash (19,733) (20) (29,580) - (29,600)
Shares issued under private
placement 1,576,851 1,578 2,696,404 - 2,697,982
Losses for the year ended
December 31, 1994 - - - (1,569,980) (1,569,980)
---------- ------- ---------- ----------- -----------
Balance Dec. 31, 1994 11,840,941 $11,841 $8,653,500 ($3,955,878) $ 4,709,463
========== ======= ========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are
an integral part of these financial statements.
F4
<PAGE> 53
CROWN LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<Captions>
Shares of Common Common Additional Paid-in Accumulated Total
Stock Stock Capital Deficit
---------------- ------- ------------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance Dec. 31, 1992 1,127,924 $ 1,127 $1,034,322 ($1,724,834) ($689,485)
Shares issued to employees pursuant
to employment agreements 4,232,824 4,232 1,380 - 5,010
Issuance of shares under Private
Placement 3,376,020 3,377 4,527,250 - 4,530,033
Shares issued to consultatns for
services rendered 607,037 608 80,098 - 80,707
Shares issued in connection with
the exercise of options 454,278 454 182,727 - 193,181
Shares issued to shareholder pursuant to
anti-dilutiion agreement which has
now been canceled 156,918 157 (157) - -
Shares issued to shareholder in connection
with the assumption of certain liabilities 113,448 114 84,886 - 85,000
Shares issued in connection with
conversion of debt 18,350 19 29,981 - 30,000
Repurchases and cancellation of shares (7,321) (7) (18,493) - (18,500)
Net loss for the period (680,904) (680,904)
---------- ------- ---------- ----------- ----------
Balance Dec. 31, 1993 10,081,384 $10,081 $5,938,007 ($2,385,698) $3,582,190
========== ======= ========== =========== ==========
The accompanying notes to the financial statements are an integral part of these financial statements.
</TABLE>
F5
<PAGE> 54
CROWN LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,569,980) ($ 660,964)
Add (deduct) items not impacting cash --
Depreciation and amortization 7,740 7,431
Write-off of previously deferred financing and
registration related costs -- 94,741
Expenses satisfied through issuances of stock -- 92,325
(Increases) decreases in assets --
Accounts receivable and advances due from officers 25,105 (27,421)
Inventory 7,459 (116)
Prepaid expenses (62,866) 45,364
Increases (decreases) in liabilities --
Accounts payable and accrued expenses 36,35 (335,046)
---------- ----------
Total cash (used) in operating activities (1,556,189) (783,686)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in leasehold improvements & equipment (2,359,866) (12,500)
Deposits on equipment purchases 92,426 (991,858)
---------- ----------
Total cash (used) in investing activities (2,267,440) (1,004,358)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of loans payable 286,650 --
Repayment of loans payable (180,751) (90,000)
Prior period of adjustment 56,520 --
Issuance of shares 48,871 30,000
Settlement of debt -- (30,000)
Settlement of Roe debt -- (82,000)
Issuance of shares -- 85,000
Repurchase of common stock (29,600) (18,500)
Proceeds from issuance of common shares and
exercise of stock options 3,194,144 4,723,814
Increase in fundraising costs (552,682) --
---------- ----------
Total cash provided by financing activities 2,823,152 4,618,314
---------- ----------
Net increase (decrease) in cash and cash equivalents (1,000,477) 2,830,270
Cash and cash equivalents, beginning of period 2,827,412 (2,858)
---------- ----------
Cash and cash equivalents, end of period $1,826,935 $2,827,412
========== ==========
</TABLE>
F6
<PAGE> 55
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1993
1. BACKGROUND AND ORGANIZATION
Crown Laboratories, Inc. (the "Company" or "Crown"), was incorporated in
February 23, 1989 as Industrialistics, Inc. In April 1989, Roe Pharmaceutical
Company ("Roe") acquired 95% of the outstanding shares of the common stock of
Industrialistics, Inc. In September 1991, Roe exchanged all of its shares of
common stock of Industrialistics, Inc. for all the outstanding common stock of
Roe. In November 1991, Industrialistics, Inc. changed its name to Crown
Laboratories, Inc. Roe was dissolved in October 1993. For accounting
purposes, the Company's financial statements reflect the carryover of Roe and
its predecessor's bases in assets and liabilities as of the date that Crown
acquired Roe.
Since inception, the Company and its predecessors have been engaged in reserach
and development of prorprietary medical nutritional dry-mix and liquid products
to be sold primarily to nursing homes and hospitals. Hostorically, the
Company's business was based substantially on dry-mix products. In order to
assure a dependable supply of its liquid and dry-mix products at a competitive
price, management determined that the Company should acquire equipment and
operate its own manufacturing facility. The Company is currently building a
manufacturing facility to produce the above products.
Crown Laboratories, Inc. anticipates it will begin manufacturing its line of
dry mix adult nutritional and specialty dietary products in April 1995. The
equipment necessary to manufacture the Company's proprietary line of aseptic
liquid products has been received, and manufacturing will begin upon completion
of the commissioning of the equipment. The commissioning process is expected
to begin by the second quarter of 1995. The commissioning process could take
approximately two months. The purchased equipment has been manufactured to the
F.D.A. regulatory specifications for aseptic packaging and processing
equipment. Commissioning of the equipment is required by the U.S. Food and
Drug Administration.
There were no sales for fiscal 1994 or fiscal 1993. During 1993, the Company
raised approximately $5,000,000 in private placement equity financing, before
related costs of approximately $440,000 (which for accounting purposes were
charged to additional paid in capital, as a reduction of the proceeds
received). The Company also charged to expense during 1993, $265,341 of costs
incurred for previous unsuccessful fund raising efforts.
The Company concluded another private placement of equity securities in
November 1994, which was sold in units of $50,000 for 25,000 shares of common
stock and warrants to purchase 12,500 shares of common stock for $3 per share.
In this Private Placement, the Company raised an additional $3,100,000 in
equity financing after subtracting selling shareholders proceeds, and before
related offering costs of approximately $425,000 and issued 1,547,975 shares
and warrants to acquire 877,500 shares of the Company's common stock at $3.00
per share (see note 6). In addition, the Company issued to the Placement Agent
and brokers warrants to acquire 165,750 shares of the Company's common stock at
a price of $2.40 per share.
The Company has leased a manufacturing and office facility and purchased,
leased and commited to lease approximately $7.0 million of production equipment
and leasehold improvements, representing all the equipment and leasehold
improvements necessary to commence operations. As of December 31, 1994, the
Company paid $3.1 million in cash for $5.5 million in production equipment and
leasehold improvements (refer to note 3 for lease commitments).
F7
<PAGE> 56
The Company and its operations are subject to the various risks inherent in the
start-up and development of a new business enterprise. The operating history
of the Company is limited. There can be no assurance the Company will be able
to produce its products and operate profitably. Competitors of the Company have
substantially greater resources than the Company. The Company may require
further financial resources. The Company will not have sales until the Las
Vegas manufacturing facility is complete and operational.
The Company regards the formulations of its products to be proprietary, but
presently it has no patent or other protective rights. The Company is studying
and evaluating the need and costs associated with patents and other protective
rights. Currently, the Company exerts substantial efforts to protect trade
secrets and to keep formulas and related process know-how confidential.
However, there can be no assurance it will be successful in these efforts. The
Company has filed to register its trademark.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
At the date of Roe's dissolution in October 1993, the consolidated financial
statements of Crown included net liabilities of Roe of $238,261. Of this
amount, net liabilities of $85,000 were assumed by Messrs. Craig Nash and Scott
Nash prior to dissolution in return for the issuance to each of 90,023 shares
of common stock of Roe. Pursuant to the reorganization and disclosure document
dated September 20, 1991, Crown exchanged 113,448 shares of common stock of
Crown for the 180,046 shares of common stock of Roe held by Messrs. Craig Nash
and Scott Nash. The assumption of $85,000 of liabilities has been reflected in
1993 as an increase to Crown's stockholder equity. Crown has been advised by
its legal counsel that it is possible, although highly unlikely, that Crown
would be responsible for the debts of Roe. Crown has substantial defenses
against such actions. Accordingly, the remaining Roe liabilities have been
written off and are reflected as other income of $153,261 in the consolidated
statement of loss for the year ended December 31, 1993.
The Company is studying both the feasibility and financing of constructing an
additional manufacturing facility in Puerto Rico. This facility would be much
smaller and would be responsible for all dry blending. Raw materials and labor
are less expensive in Puerto Rico than in Las Vegas, Nevada, and will result in
a lower cost of manufacturing. The Company would be eligible for employee tax
credits and grants from the Puerto Rican government to cover moving costs and
leasehold improvements. In order to qualify for these tax credits, the Company
has arranged for the incorporation of this subsidiary in Puerto Rico, which has
not yet been capitalized, and would attempt to raise up to $6 million in such
subsidiary on terms and conditions acceptable to the Company. One possibility
being considered is that the Company would issue shares of convertible
preferred Stock. Through December 31, 1994, the Company had incurred and
expensed $49,018 relating to these efforts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less at the date of purchase.
F8
<PAGE> 57
Inventory
Inventory is stated at the lower cost or market using the first-in first-out
method of accounting. At December 31, 1994 and 1993, inventory consisted of
the following:
<TABLE>
<Captions>
1994 1993
------ ------
<S> <C> <C>
Raw Materials $1,588 $6,359
Work in Progress 0 2,575
Finished Goods 0 113
------ ------
Inventory $1,588 $9,047
------ ------
</TABLE>
Property and Equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are recorded using the straight line method over the estimated
useful lives of assets which are generally five years. Recently acquired
equipment and improvements for the new production facility will not be
depreciated until production begins. The Company only capitalizes those costs
directly related to the equipment and has not capitalized any management,
executive or overhead costs. Such costs are charged to expense as they are
incurred. At December 31, 1994 and 1993 property and equipment included the
following:
<TABLE>
<Captions>
1994 1993
---------- -------
<S> <C> <C>
Leasehold Improvements $ 886,424 $12,500
Equipment 2,418,946 37,152
---------- -------
3,305,370 49,652
Accumulated Depreciation (36,284) (28,852)
---------- -------
Net Property and Equipment $3,269,086 $20,800
---------- -------
</TABLE>
As of February 28, 1995, property and equipment has increased from $3,305,370
to $6,043,094. Long term debt has increased by $1,750,000, which includes the
SBA loan for $750,000 and a $1,000,000 loan from Standard Chartered Bank for
the filler, which are both discussed in Note 10.
Income Taxes
The Company has operated at a loss since inception and has a net loss
carryforward of $3,955,878 as of December 31, 1994. Roe had a substantial net
operating loss carryforward at the time of dissolution. The Company is
researching the availability of such net operating losses to the Company. The
availability of all loss carryforwards may be limited as a result of changes in
shareholders and certain elections made by the Company. For accounting
purposes the Company has provided a full valuation allowance for these loss
carryforwards and has not established a deferred tax asset.
Presentation of Share Data
On January 16, 1993, the Company declared a 2.5:1 reverse split of its then
outstanding shares of common stock. A second 2.5:1 reverse split was also
declared on July 26, 1993 of its then outstanding shares of common stock. All
shares and per share amounts and shareholder equity accounts have been restated
to give effect to these reverse stock splits as if such reverse stock splits
had occurred on January 1, 1993.
Earnings Per Share
Earnings per share of common stock and common stock equivalents have been
computed using the weighted average number of shares of common stock
outstanding as adjusted to reflect shares issued to executives pursuant to
employment agreements and options as if such shares had been issued effective
January 1, 1993. The dilutive effect, if any, of common stock equivalents
assumed to be outstanding during the period have also been considered in
computing earnings per share. Since the inclusion of the
F9
<PAGE> 58
options results in a decreased loss on a per share basis, the options were not
included in computing earnings per share. All earning per share amounts have
been adjusted to give effect to the reverse stock splits described above.
Since the date of their issuances, the Company's outstanding warrants have not
been dilutive for the purposes of the earnings per share computation.
Supplemental Statement of Cash Flows Information
The following information supplements the statement of cash flows for the years
ended December 31, 1994 and 1993.
<TABLE>
<CAPTION> 1994 1993
-------- -------
<S> <C> <C>
Interest Paid $ 41,039 $40,392
Income Taxes $ 0 0
Assets acquired through capital lease financing $895,852 $ 0
</TABLE>
3. Long-term Debt and Capital Lease Liabilities
<TABLE>
<CAPTION>
Collateral 12-31-94 12-31-93
---------- -------- --------
<S> <C> <C> <C>
First Security Bank of Nevada -
Guaranteed by Messrs. Craig and Scott Nash
Monthly payments of $8,430 for 84 months
ending December 2002 (see note 10) unsecured $503,982 $ 0
General Electric Capital Corporation -
Guaranteed by Messrs. Craig and Scott Nash
Monthly lease payments of $11,100 for 60 months
ending July 1999. Original balance $514,605 Processor 476,163 0
MCBA, Inc. -
Monthly lease payments of $3,401 for 36 months
ending June 1997. Original balance $109,000 Software 84,639 0
Memorex-Telex -
Monthly lease payments of $1,396 for 36 months
ending June 1997. Original balance $35,727 Computer 31,429 0
Sprint/North Leasing
Monthly lease payments of $533 for 36 months
ending August 1997. Telephone 15,538 0
Sterling Casualty Insurance Company -
Due in February 1994 and paid off Unsecured 0 110,000
-------- --------
1,111,751 110,000
Less: current portion 298,320 110,000
-------- --------
Long-term debt net of current portion: $813,431 $ 0
======== ========
</TABLE>
The amounts due under the lease obligations are net of interest expense.
F10
<PAGE> 59
Capital lease liabilities and long-term debt as of December 31, 1994 are
payable as follows:
<TABLE>
<S> <C>
1995 $ 289,860
1996 298,320
1997 267,406
1998 234,360
1999 178,860
Thereafter 210,780
----------
1,479,586
Less amount representing interest 367,835
----------
$1,111,751
==========
</TABLE>
4. Management Employment Contracts
<TABLE>
<CAPTION>
Shares of
Employee Date Term Salary Common Stock Options
<S> <C> <C> <C> <C> <C>
Craig Nash 1/93 5 years $60,000 (1) 2,086,462 (6)
Scott Nash 1/93 5 years $60,000 (1) 2,086,462 (6)
Christopher Demetree 1/93 5 years $60,000 (2) 288,000 (7)
Michael Tom 6/93 5 years $60,000 (3) 180,000 (8)
Brent Coeur-Barron 8/94 5 years $60,000 (3) 100,000 (9) 125,000 (9)
Larry Rosenthal 12/93 5 years $54,000 (3) 66,000(10)
Lawrence Loman 1/93 5 years $66,000 (4) 146,000(11)
Lillie Thomas 1/93 5 years $46,000 (5) 146,000(11)
Jim Doerr 6/94 5 years $55,000(13) 50,000(12)
</TABLE>
(1) Base salary increases as follows: January 1, 1995 - $70,000; January 1,
1996 - $90,000; January 1, 1997 - $110,000. Employee is entitled to
severance compensation of twenty-four months of base pay unless
terminated voluntarily or for cause. The employee has agreed to waive
pay increases over the $60,000 base pay until 90 days after the Company
is shipping.
(2) Base salary increases as follows: January 1, 1995 - $60,000; January 1,
1996 - $70,000; January 1, 1997 - $80,000. Employee is entitled to
severance compensation of twenty-four months of base pay unless
terminated voluntarily or for cause.
(3) Base salary is subject to review after January 1, 1995. Mr. Brent
Coeur-Barron is entitled to severance compensation of three months of
base pay unless terminated voluntarily or for cause. Mr. Lawrence
Rosenthal is entitled to severance compensation of six months of base
pay unless terminated voluntarily or for cause. The Mr. Michael Tom has
agreed to waive pay increases over the $60,000 base pay until 90 days
after the Company is shipping.
F11
<PAGE> 60
(4) Base salary increases as follows: January 1, 1995 - $66,000; January 1,
1996 - $70,000; January 1, 1997 - $75,000. Employee is entitled to
severance compensation of twelve months of base pay unless terminated
voluntarily or for cause.
(5) Base salary increases as follows: January 1, 1995 - $46,000; January 1,
1996 - $46,000; January 1, 1997 - $52,000. Employee is entitled to
severance compensation of six months of base pay unless terminated
voluntarily or for cause.
(6) 2,056,462 shares are fully vested. The remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
will fully vest as follows: January 3, 1995 - 10,000 shares; January 3,
1996 - 10,000 shares; January 3, 1997 - 10,000.
(7) 264,000 shares are fully vested. The remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
will fully vest as follows: June 18, 1995 - 8,000; June 18, 1996 -
8,000 shares; June 18, 1997 - 8,000 shares.
(8) 90,000 shares are fully vested; the remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
fully vest as follows: June 26, 1995 - 36,000 shares; June 26, 1996 -
36,000 shares; June 26, 1997 - 18,000 shares.
(9) 20,000 shares are fully vested; the remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
fully vest as follows: August 31, 1995 - 16,000 shares; August 31, 1996
- 16,000 shares; August 31, 1997 - 16,000 shares; August 31, 1998 -
16,000 shares; August 31, 1999 - 16,000 shares. Options to purchase
25,000 shares at $1.70 per shares are fully vested (fair market value at
the date of issuance); the remaining options are subject to forfeiture
upon termination of employment voluntarily or with cause and vest as
follows: August 31, 1995 - 20,000 shares; August 31, 1996 - 20,000
shares; August 31, 1997 - 20,000; August 31, 1998 - 20,000 shares;
August 31, 1999 - 20,000 shares.
(10) 30,000 shares are fully vested; the remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
fully vest as follows: December 7, 1994 - 6,000 shares; December 7,
1995 - 12,000 shares; December 7, 1996 - 12,000 shares; December 7,
1998 - 6,000 shares.
(11) 134,000 shares are fully vested; the remaining shares are subject to
forfeiture upon termination of employment voluntarily or with cause and
fully vest as follows; January 1, 1995 - 4,000 shares; January 1, 1996
- 4,000 shares; January 1, 1997 - 4,000 shares.
(12) Options to purchase shares of common stock at $1.50 per share (fair
market value at the date of issuance); are subject to forfeiture upon
termination of employment or with cause and vest as follows: June 15,
1995 - 10,000 shares; June 15, 1996 - 10,000 shares; June 15, 1997 -
10,000 shares; June 15, 1998 - 10,000 shares; June 15, 1999 - 10,000
shares. Forfeiture provisions do not apply if termination is voluntary
or without cause.
(13) Base salary increase as follows: June 15, 1995 - $59,000; June 15, 1996
- $65,000; June 15, 1997 - $69,000; June 15, 1998 - $76,000. Employee
is entitled to severance compensation of three months of base pay unless
terminated voluntarily or without cause.
F12
<PAGE> 61
With the exception of the shares given to Mr. Brent Coeur-Barron, all common
stock issued to employees were ascribed a nominal value by the Company and its
investment adviser given the inherent uncertainty as to the ability of the
Company to raise capital and continue in existence as of the dates such shares
were issued. Mr. Coeur-Barron's shares have been valued at $0.85, the cost of
which is being recognized over the vesting period of such shares.
Each of the above employment agreements prohibit the individual from directly
or indirectly competing with the Company for a period of three years after
separation from the Company, and binds the individual to certain
confidentiality agreements.
In connection with the employment agreements described above, the Company has
an obligation to make minimum cash payments of $523,000 for 1995, $627,000 for
1996, $705,000 for 1997, $717,500 for 1998, and $721,000 for 1999.
In the first quarter of 1994, 114,934 shares of common stock were issued to
three consultants for service contracts. The equivalent fair value of these
shares will be expensed as they are earned throughout the contract periods. One
contract covers a two year period: 79,000 shares will be earned at the rate of
3,292 shares per month beginning Juner 1994. During this quarter, the
equivalent value of 9,876 common shares of stock was expensed at $.75 per share
(50% of fair market value on the date of agreement). Such value is based upon
an opinion the Company received from its investment advisor and primarily
differs from the asking price as a result of restrictions. Another consultant
received 31,934 common shares of which the equivalent value of 1,934 shares was
expensed in the quarter ended June 30, 1994 for services rendered. The
consultant returned the balance of 30,000 shares to the Company. The balance
of 4,000 shares having an equivalent value of $3,000, was completely expensed
in 1994, the period in which the services were performed.
The Company has established a bonus pool, whereby 10% of pre-tax profits will
be made available to employees, with Craig and Scott Nash in the aggregate
being entitled to 50% of the bonus pool. The remainder of the pool will be
allocated at the discretion of the Chief Executive Officer. Given that the
Company has not yet generated pre-tax profits, no bonuses have been paid.
5. 1992 Stock Option Plan
In December 1992, the Company adopted the 1992 Stock Option Plan (the "Plan").
The Plan provides for the granting of non-statutory stock options or incentive
stock options to certain key employees to purchase up to an aggregate of
2,100,000 shares of Common Stock. The option price per share for non-statutory
options must be at least 85% of the fair market value on the date of grant.
The Stock Option Plan terminates in 2002.
Options are not transferable under the Plan and terminate within specified
periods of time after termination of an optionee's employment.
F13
<PAGE> 62
On November 18, 1993, options to purchase 2,100,000 shares of the Company's
common stock were granted to the Company's employees in the amount listed
below. These options have an exercise price of $1.275 and are fully vested.
All 2,100,000 options expire in 2003.
<TABLE>
<CAPTION>
Name Number of Options
---- -----------------
<S> <C>
Craig Nash 768,028
Scott Nash 768,029
Christopher Demetree 258,910
Michael Tom 225,033
Lawrence Loman 40,000
Lillie Thomas 40,000
</TABLE>
6. Other Stock Options and Warrants
As of December 31, 1994, the Company had granted the following options to
purchase 1,131,503 shares of its common stock at the following exercise prices:
<TABLE>
<CAPTION> # shares subject to date of
forfeiture vesting
<S> <C> <C>
260,000 shares at $1.275 per share through June 1997 50,000 1-96
246,503 shares at $1.65 per share through August 1998 -0-
50,000 shares at $1.50 per share through June 1999 -0-
125,000 shares at $1.70 per share through September 1999 -0-
100,000 shares at $1.38 per share through June 29, 1999 50,000 5-96
200,000 shares at $1.75 per share through September 24,1999 200,000 see below
</TABLE>
The options to purchase 200,000 shares of common stock at $1.75 per share has
been granted to a marketing consultant. The vesting of these options are based
on various levels of performance as per the marketing agreement.
In connection with the private placement of 1,547,975 shares of the Company's
common stock in November 1994, the Company issued warrants to acquire 877,500
shares of the Company's common stock at an exercise price of $3.00 per share.
The Company has the right to call such warrants at a call price of $.10 per
warrant, if at any time the current market price of the Company's common stock
has been at least $4.00 per share for 30 consecutive days, ending within 15 days
of the notice of such call. All unexercised and uncalled warrants will expire
on November 30, 1996. The Company also issued to its placement agent and
brokers warrants to acquire 165,750 shares of the Company's common stock at an
exercise price of $2.40 per share. These warrants will expire on November 30,
1999.
7. Preferred Stock and Potential Anti-Takeover Rights
The Company is authorized to issue 5,000,000 shares of $0.001 par value
preferred stock with the rights, preferences, privileges and restrictions
thereof to be determined by the board of directors of the Company. Preferred
stock can be issued without the vote of holders of common stock. Rights could
be granted to the holders of preferred stock that could reduce the
attractiveness of the Company as a potential takeover target, make the removal
of management more difficult, or adversely impact the rights of holders of
common stock. No preferred stock is currently outstanding, and there are no
present plans for the issuance of any shares of preferred stock.
F14
<PAGE> 63
The Company's Certificate of Incorporation contains certain provisions designed
to require a beneficial owner of over 25% of the common stock to comply with
certain provisions regarding transactions with the Company and membership on
the board of directors, or pay certain prices (usually the highest price per
share paid) for the Company's stock in certain business combinations involving
the beneficial owner. These provisions are in addition to those provided by
Delaware law.
8. Dividend Policy
Since its inception, the Company has not generated any earnings and has not
paid any dividends on its common stock. Payment of future dividends, if any,
will be determined by the Company's Board of Directors based upon a number of
considerations, including the Company's financial condition, capital
requirements, cash flow, profitability, business outlook, contractual
restrictions and other factors. In the foreseeable future, the Company intends
to retain all of its earnings to finance the development and expansion of its
business.
9. Commitments and Contingencies
The Company has entered into a five year lease for its Las Vegas manufacturing
facility, which requires monthly payments of $25,080, subject to escalation
commencing in September of 1995. Additionally, the Company has entered into
other operating leases for office equipment, which generally range between
three and five years. During 1994, the Company paid $100,320 in lease payments
for the building. Minimum payments due under all operating leases and the
building are as follows:
<TABLE>
<S> <C>
1995 $300,960
1996 $300,960
1997 $300,960
1998 $300,960
1999 $200,640
</TABLE>
As of December 31, 1994, the Company had entered into agreements to purchase
$5.5 million of equipment of which $3.1 million has been paid.
In 1990, the Company entered into a five-year brokerage agreement with
International Marketing and Sales ("IMS") to act as exclusive sales broker for
an anticipated significant customer. Under such agreement, IMS is entitled to
receive commissions of 2% to 5% and up to 37,806 shares of the Company's common
stock if certain sales levels are achieved.
The Company is negotiating with various parties to enter into consulting
arrangements. The Company will compensate consultants either in cash, shares
of common stock, or a combination thereof.
A significant portion of the Company's outstanding common shares have been
issued with registration rights, which will require the Company to pay for the
costs of any registration processing.
The Company has been subject to routine business litigation. Currently, the
Company has three matters pending which the Company does not consider to be
routine:
Crown v. Swinney et al. was filed by the Company in March 1994, in the
District Court for the State of Nevada, concerning the attempt of a shareholder
to sell unregistered securities of the Company by public sale. The Company has
obtained a temporary restraining order preventing the sale which has been in
effect since March 1994. A hearing has been held, and this matter is currently
pending decision of the Court. The
F15
<PAGE> 64
Company believes that it will prevail in this matter and the liability of the
Company, if any, would be limited to attorneys fees for the defendant.
Zananiri v. Crown et al. was a lawsuit filed by Mr. Zananiri in April,
1994 in California Superior Court alleging fraud and "alter ego" arising from a
debt of Roe Pharmaceutical Co., a discontinued subsidiary of the Company, which
was personally guaranteed by Craig Nash. The Company expects to file a Motion
for Summary Judgment, since the underlying debt has been fully satisfied by Mr.
Nash. The Company believes it will prevail and will have no liability in this
action.
Crown v. Antretter et al. was filed in Federal District Court in the
State of Nevada by the Company in November 1994 seeking an injunction and
damages concerning the disclosure of non-public material information,
misinformation and omission of material fact by Mr. Antretter, a former
director and former investment banker of the Company, selectively to his
clients and broker dealers. These communications were not authorized by the
Company, and were in direct violation of the agreements Mr. Antretter has with
the Company. The Company's request for a temporary injunction was denied.
However, the Court reserved the right to reconsider a preliminary injunction
if Mr. Antretter continued to breach his agreement or made any other
disclosures. Mr. Antretter filed a Motion to Dismiss, which on March 10, 1995,
the Court dismissed and treated as a Motion to Amend. Crown will file an
amended complaint to further support its allegations and quantify its damages.
The Company believes that it will prevail on the merits.
OTHER LEGAL MATTERS
John D. Kaweske is associated with R.K. Grace and Company, the current
investment banker of the Company. He was also the former partner of John
Antretter, the former investment banker of the Company. John D. Kaweske has
informed the Company that his father, John J. Kaweske, has been sued by the
Securities and Exchange Commission. The suit alleges that there has been a
civil violation of the securities laws regarding commissions paid by the
Company directly to John Antretter, pursuant to an agreement the Company had
with John Antretter, for an investment made by funds managed by John J.
Kaweske. The Securities and Exchange Commission has requested and received
full documentation from the Company regarding the payment of the commissions to
Mr. Antretter. The Company's records reflect that Mr. Antretter was paid
commissions in full for all investments received from the funds managed by John
J. Kaweske. To the best of the Company's knowledge, the Company is not the
subject of any investigation by the Securities and Exchange Commission,
specifically, or any other person or entity, nor is it a party to this
litigation or any other litigation being pursued by the Securities and Exchange
Commission.
10. SUBSEQUENT EVENTS
On January 27, 1995, the Company obtained a $750,000 loan from the Small
Business Administration, which will be payable over ten years at monthly
payments of $10,440. The SBA has a UCC-1 filing on all of the assets of Crown.
As additional collateral, the SBA required the personal guarantees of Messrs.
Craig Nash and Scott Nash, and that they escrow 500,000 of their shares of
Crown common stock. The Company has committed to replace this stock in the
event the lender moves against the escrowed shares.
F16
<PAGE> 65
Standard Chartered Bank (Switzerland) S.A., has agreed to loan the Company
$1,000,000 towards the purchase of the filler machine. The date of the loan
will begin when the filler machine has been installed and passes all tests in
the Las Vegas plant. The interest rate will be 8.5%. Repayment is as follows:
1) $775,000 is repayable in 18 monthly payments of $43,056, plus interest.
The first installment is due two months after the date of the loan, and the
last monthly installment is due and payable 19 months after the date of the
loan, 2) a balloon payment of $225,000 is due and payable 20 months after the
date of the loan. The Company has granted to Standard Chartered Bank a
security interest in the filler machine.
The Company is currently seeking to raise up to $2.2 million (44 Units) in
additional equity financing through another Private placement (the "Second
Private Placement"). The terms and conditions of the Second Private Placement
are similar to the terms and conditions of the recently concluded Private
Placement. Subsequent to December 31, 1994, $387,500 has been raised from the
Second Private Placement. At the Company's option and discretion, it may
increase the amount to be raised in the Second Private Placement, close the
Second Private Placement, or extend the Second Private Placement. There can be
no assurances that the Company will be able to successfully complete the Second
Private Placement or if completed, that the Company would not require
additional funds at a later date, which would involve dilution to the Company's
existing shareholders.
In January 1995, the Company retained an investment consultant for public
relations and stock promotion. He receives a monthly fee and based on
performance, can earn options to purchase up to 150,000 shares of common stock
at a price per share equal to fair market value at the time he signed the
agreement. These options will expire in January 2000.
11. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
With respect to the matter of Zaniniri v. Crown et al discussed in Note 9, the
Company filed a Motion for Summary Judgment, since the underlying debt has been
fully satisfied by Mr. Nash. On April 20, 1995, Mr. Zaniniri dismissed the
lawsuit without prejudice. The Company is filing a motion to recover its legal
fees in this matter.
With respect to the matter of Crown v. Antretter et al discussed in Note 9, the
Company has filed an amended complaint to further support its allegations and
quantify its damages. Mr. Antretter has subsequently filed another Motion to
Dismiss. The Company believes that it will prevail on the merits.
In addition to the $387,500 raised in the Second Private Placement discussed in
Note 10, the Company has raised a further $990,000 for a total of $1,377,500 of
equity financing, as of April 25, 1995.
The Company anticipates it will begin manufacturing its line of dry mix adult
nutritional and specialty dietary products during the second quarter of 1995.
F17
<PAGE> 66
EXHIBIT B
Form 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1933
Commission File No. 1-12848
CROWN LABORATORIES, INC.
Delaware 75-2300995
(State of Incorporation) (I.R.S. Employer I.D. No.)
6780 Caballo Street
Las Vegas, Nevada 89119
(Address of Principal Executive Office)
(702) 696-9300
(Registrant's Telephone Number, Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all the 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
----- -----
The number of outstanding shares of the registrant's only class of common stock
as of September 30, 1995
Common Stock, $.001 par value -- 13,802,513
<PAGE> 67
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. BACKGROUND AND ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB and Item 310
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 1995 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1995. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Crown Laboratories, Inc. Annual Report on
Form 10-KSB/A2 (as amended).
2. MANUFACTURING FACILITY
The Company received its approval from the State of Nevada Health Department to
produce dry mix and milk products and began production of its line of dry mix
adult nutritional specialty dietary products during the quarter. Limited
inter-company transfers of dry-mix products to an affiliate began in August,
1995 (in respect of which transfer, no revenues were recognized) but sales of
liquid nutritional products, the Company's intended primary product line,
cannot begin until certification of the aseptic manufacturing and filling
equipment is completed.
The Company is presently in the process of seeking to commission the equipment
necessary to manufacture its proprietary line of aseptic liquid products.
Commissioning of the equipment is required by the U.S. Food and Drug
Administration. The commissioning process begins with the manufacture, (in
this case, the Company), working with an independent laboratory, (the Process
Authority), to review its manufacturing equipment, manufacturing procedures,
manuals and monitor the bacteriological kill tests. After the samples of
inoculated product (the final test required for certification) are prepared,
they are incubated for a 21 day period and if the test results are favorable,
the Process Authority summarizes and presents their findings to the F.D.A. on
the Company's behalf. The F.D.A. then has 30 working days to respond to the
Company with additional questions or requests for information. In the absence
of such a request, the Company is authorized to produce and market its
products. There can be no assurances that the test samples will pass the test
criteria, or if they do pass, that the F.D.A. will approve the Company's
process and equipment.
Although the equipment manufacturers have warranted that the purchased equipment
has been manufactured to the F.D.A. regulatory specifications for aseptic
packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. company requiring F.D.A. aseptic
1
<PAGE> 68
processing approval. The delays in certifying the Company's production
equipment can be attributed to the aseptic filling machine. The machine was
unable to pass certification testing when it was originally shipped from
Germany in February. Numerous modifications, primarily related to installing
monitoring devices to seek to meet F.D.A. requirements, have been made to the
machinery at the request of the Process Authority. The manufacturer of the
aseptic filling machine has filed for bankruptcy in the German courts. The
Company has filed claim against the manufacturer of the aseptic filler in
the German Bankruptcy Court for damages caused by the delays in certifying the
filler and seeks to have these damages applied against the purchase price of the
machine. Further, the Company has filed suit in Las Vegas, Nevada against the
manufacturer and its alter egos and subsidiaries alleging fraud,
misrepresentation, and alter ego among other allegations. To further protect
its rights to the machinery and its related technology, the Company has
purchased the blueprints and the rights to its aseptic filling machine from the
German bankruptcy court.
While the Company believes that the machinery will ultimately be certified,
there can be no assurances that the machinery will receive certification from
the F.D.A. or that the certification will be granted within a specific time
frame. Furthermore, there can be no assurances that, if the machinery is
certified, if and when the Company will commence initial production of its
liquid nutritional products or that the products will meet with acceptance in
the market.
3. FINANCING
Since January 1, 1995, the Company has raised approximately $2.4 million
(before offering expenses of $330,000) in additional equity financing primarily
through a private placement and this amount is reflected in accompanying
financial statements. Each unit was purchased for $50,000. A unit consisted
of 25,000 shares of common stock and warrnts to purchase 12,500 shares of
common stock for $3 per share. The warrants expire two years from the date of
issuance. (Fractional units have been sold). In addition, the Company issued
to the Placement Agent and brokers 2,500 options to acquire shares of the
Company's common stock at a price of $2.40 per share for each unit sold. These
options expire five years from the date of issuance.
The Company has also raised $3 million (before offering expenses of $150,000)
through the issuance of Series C Preferred Stock during the third quarter and
$500,000 thereafter. The Seriec C Preferred Stock pays no dividends, but
imputes a 6% effective annual interest rate upon conversion into common stock
which will be accounted for over the time during which the preferred stock is
outstanding. The conversion rate is determined by the acquisition value of the
preferred stock (plus imputed interest referred to above) and an 18% discount
to the 5 day average market price of the common shares at the time of exercise.
As of September 30, 1995, approximately 29% of the Series C Preferred Stock
issued had been converted into 715,447 shares. To the extent that the Company
uses equity securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing
shareholders. See "Management's Discussion and Analysis and Results of
Operation and Financial Condition".
4. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Refer to Form 10-KSB/A2 for discussions on significant Accounting Policies.
2
<PAGE> 69
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into a five year lease for its Las Vegas manufacturing
facility, which requires monthly payments of $25,802, subject to annual CPI
escalations in September of each year. Minimum payments due on the building are
as follows:
<TABLE>
<S> <C>
1995 $303,848
1996 $309,624
1997 $309,624
1998 $309,624
1999 $206,416
</TABLE>
As of September 30, 1995, the Company estimates that its additional costs to
complete the facility and pay for and install packaging equipment will be
approximately $0.5 million.
6. LITIGATION
The Company will be subject to normal business litigation and claims concerning
products and services rendered to the Company. Associated with the Company's
construction of its manufacturing facility, the Company has disputes with three
contractors over the services performed. The Company's claims are for
defective workmanship, excessive charges for services rendered, and returns
which have not been accepted by the vendor. These vendors have filed suit
against the Company and the Company has filed its counterclaims, recognizing
the amount of two of the claims, capitalizing the expenses and recording the
liabilities. Although the Company believes that its claims and counterclaims
have merit, there can be no assurances that the Company will prevail on the
merits of any or all of its claims.
In addition to normal business litigation, the Company has the following
material litigation:
In CROWN V. SWINNEY et al., the Company has sought to enforce the legends on
its stock under the Securities Act of 1933. The Court failed to uphold the
temporary restraining order previously issued, and the Company has appealed
this decision on the basis that this action ignores applicable federal law.
The Company feels that its liability will be limited to attorney's fees which
amount will not be material.
CROWN v. ANTRETTER was filed in Federal District Court in the State of Nevada
by the Company in November, 1994 seeking injunctive relief concerning
disclosures made by Antretter selectively to his clients. Such disclosure was
in violation of certain agreements Antretter has with the Company and the
Company alleged this disclosure to be in violation of the Securities Exchange
Act of 1934. The Court dismissed, for lack of standing, the causes of action
concerning the Securities Exchange Act of 1934. The Court further dismissed,
without prejudice, the injunctive causes of action so that they could be
brought in State Court.
7. SUBSEQUENT EVENTS
The Company has identified a line of water solution products which it
anticipates will complement its initial line of liquid nutritionals, selling to
the same customer base and delivered through the same
3
<PAGE> 70
distribution channels. It has produced samples of its water solution products;
sterile water, normal saline and potassium chloride solution and has forwarded
them to an independent laboratory for testing. This is the first stage in the
certification process for sterile water products. While the Company believes
that it can compete effectively in the market for these products, there can be
no assurances that, if the machinery is certified, if and when the Company will
commence initial production of its water solution products or that the products
will meet with acceptance in the market.
In May, the Company filed for patent rights on its primary product, WinLac, and
its related processing technology. It presently has patent pending status.
In the fourth quarter, the Company has sold approximately $40,000 of dry mix
products in one European Country through an affiliate and has collected a
portion of the resulting receivables.
The Company has received an option to purchase its current manufacturing
facility in Las Vegas, Nevada for $2,700,000 and intends to pursue this option.
The Company has secured a commitment for a first mortgage loan of $1,860,000 on
the building from an insurance company. The mortgage, which carries an interest
rate of 8.65%, provides for an 18 year amortization ($16,984 per month) with a
balloon payment due at the end of ten years at the insurance company's request.
The seller of the property has agreed to accept 153,043 shares of the Company's
common stock in lieu of $440,000 of the purchase price and has agreed to extend
a 3 year $300,000 second mortgage to the Company bearing a 12% annual effective
interest rate. The balance of the purchase price, ($100,000) plus any closing
costs will be paid by the Company.
The Company has raised an additional $500,000 through the issuance of Series C
Preferred Stock.
The Company has sublet 20,000 square feet of its plant for a year at rate of
$.42 per square foot. The lessee has the option to extend the lease for a two
month period.
4
<PAGE> 71
CROWN LABORATORIES, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
FOR THE 3 MONTH PERIODS ENDED FOR THE 9 MONTH PERIODS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ - $ - $ - $ -
Cost of Sales - - - -
General and Administrative Expenses 1,064,050 353,753 2,531,445 855,098
----------- ------------ ----------- -----------
OPERATING PROFIT/(LOSS) (1,064,050) (353,753) (2,531,445) (855,098)
Other Income/(Expense)
Interest expense (84,152) (18,974) (153,048) (20,673)
Interest income 7,914 4,291 36,657 30,183
----------- ------------ ----------- -----------
LOSS BEFORE INCOME TAXES (1,140,288) (368,436) (2,647,836) (845,568)
Income Tax Provision - - - -
----------- ------------ ----------- -----------
NET PROFIT/(LOSS) $(1,140,288) $ (368,436) $(2,647,836) $ (845,588)
=========== ============ =========== ===========
NET LOSS PER SHARE $(0.09) $(0.04) $(0.20) $(0.08)
====== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 12,663,873 10,210,966 13,289,678 10,210,966
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements.
<PAGE> 72
CROWN LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,768,486 $1,826,935
Employee and officer advances 15,466 5,445
Inventory
Raw & Packaging Materials 171,960 1,588
Finished Goods 50,000
-------
221,960
Prepaid expenses 19,821 62,866
----------- ----------
Total current assets 2,015,733 1,896,834
PROPERTY AND EQUIPMENT
Leasehold improvements 1,193,185 886,424
Equipment 6,670,842 2,418,946
----------- ----------
7,864,027 3,305,370
Accumulated Depreciation & Amortization (95,879) (36,284)
----------- ----------
Net Property and Equipment 7,768,148 3,269,086
DEPOSITS & DEFERRED ASSETS 301,824 899,124
----------- ----------
Total assets $10,085,705 $6,065,044
=========== ==========
LIABILITIES ANS SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and
capital lease liabilities $ 245,886 $ 298,320
Accounts payable and accrued expenses 1,109,050 243,830
----------- -----------
Total current liabilities 1,354,936 542,150
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,452,194 813,431
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
PREFERRED STOCK - $0.001 par value; 2,120,000
5,000,000 shares authorized;
212 shares outstanding
COMMON STOCK - $0.001 par value;
50,000,000 shares authorized;
13,802,513 and 11,840,941 shares
outstanding in 1995 and 1994,
respectively 13,802 11,841
Additional paid-in-capital 11,748,487 8,653,500
Accumulated deficit (6,603,714) (3,955,878)
----------- -----------
Total shareholders' equity 7,278,575 4,709,463
Total liabilities and shareholders' equity $10,085,705 $ 6,065,044
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidted Financial Statements are
an Integral Part of these Financial Statements.
<PAGE> 73
CROWN LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit/(Loss) $(2,647,836) $ (845,588)
Add/(deduct) items not impacting cash:
Depreciation and amortization 59,595 5,805
Employee stock grants 140,992
Issuance of shares to consultants 7,407
Funds used in Operations:
(Increase)/Decrease in inventories (220,372)
(Increase)/Decrease in prepaid expenses 33,024 (133,261)
and employee advances
Increase/(Decrease) in accounts payable 865,220 (60,553)
and accrued expenses
Increase/(Decrease) in deferred assets 25,800
Total Cash Generated from/(used for)
operations $(1,761,970) $(1,007,797)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (4,251,896) (1,915,875)
(Increase)/Decrease in leasehold
improvements (306,761) (65,149)
(Increase)/Decrease in deposits and
deferred assets 597,300
(Increase)/Decrease in fund raising
activities (79,289)
Total cash (used in)/generated from
investing activities (3,961,357) (2,060,313)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans 750,000 659,332
Repayment of loans payable (163,671) (147,448)
Proceeds from issuance of common and
preferred stock and the exercise of
options 5,399,750 46,348
Fundraising costs (331,201)
Repurchase of common shares (29,600)
Prior period adjustments 56,520
Total cash provided by/(used in) financing
activiies 5,654,878 585,152
Net increase/(decrease) in cash and cash
equivalents (68,449) (2,482,958)
Cash and cash equivalents, beginning of period 1,826,935 2,827,412
----------- -----------
Cash and cash equivalents, end of period $ 1,758,486 $ 344,454
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
<PAGE> 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company has been in the pre-marketing phase of operation and had no sales
for the nine month periods ended September 30, 1995 and 1994. For the three
and nine month periods ended September 30, 1995, the Company incurred losses of
$1,140,288 and $2,647,836, respectively. The accumulated consolidated deficit
at September 30, 1995 was $6,603,714. Losses have continued since such date
due primarily to expenditures for salaries, plant start-up and other operating
expenses.
The Company is presently in the process of seeking to commission the equipment
necessary to manufacture its proprietary line of aseptic liquid products.
Commissioning of the equipment is required by the U.S. Food and Drug
Administration. The commissioning process begins with the manufacture, (in
this case, the Company), working with an independent laboratory, (the Process
Authority), to review its manufacturing equipment, manufacturing procedures,
manuals and monitor the bacteriological kill tests. After the samples of
inoculated product (the final test required for certification) are prepared,
they are incubated for a 21 day period and if the test results are favorable,
the Process Authority summarizes and presents their findings to the F.D.A. on
the Company's behalf. The F.D.A. then has 30 working days to respond to the
Company with additional questions or requests for information. In the absence
of such a request, the Company is authorized to produce and market its
products. There can be no assurances that the test samples will pass the test
criteria, or if they do pass, that the F.D.A. will approve the Company's
process and equipment.
Although the equipment manufacturers have warranted that the purchased
equipment has been manufactured to the F.D.A. regulatory specifications for
aseptic packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. company requiring F.D.A. aseptic processing approval.
The delays in certifying the Company's production equipment can be attributed
to the aseptic filling machine. The machine was unable to pass certification
testing when it was originally shipped from Germany in February. Numerous
modifications, primarily related to installing monitoring devices to seek to
meet F.D.A. requirements, have been made to the machinery at the request of the
Process Authority. The manufacturer of the aseptic filling machine has filed
for bankruptcy in the German courts. The Company has filed claim against the
manufacturer of the aseptic filler in the German Bankruptcy Court for damages
caused by the delays in certifying the filler and seeks to have these damages
applied against the purchase price of the machine. Further, the Company has
filed suit in Las Vegas, Nevada against the manufacturer and its alter egos and
subsidiaries alleging fraud, misrepresentation, and alter ego among other
allegations. To further protect its rights to the machinery and its related
technology, the Company has purchased the blueprints and the rights to its
aseptic filling machine from the German bankruptcy court.
While the Company believes that the machinery will ultimately be certified,
there can be no assurances that the machinery will receive certification from
the F.D.A. or that the certification will be granted within a specific time
frame. Furthermore, there can be no assurances that, if the
5
<PAGE> 75
machinery is certified, if and when the Company will commence initial
production of its liquid nutritional products or that the products will meet
with acceptance in the market.
Through the first nine months of 1995, the Company has entered into agreements
with certain employees which provide for the grant of common stock and stock
options which vest over a five year period. Compensation expense relating to
these common stock grants approximates $140,000 for the nine months ended
September 30, 1995. Stock options were granted at 85% of market price at the
time of the grant and did not result in any compensation expense.
FINANCIAL CONDITION
Working capital at September 30, 1995 was $.5 million with $.8 million in
accounts payable attributable to capital expenditures and leasehold
improvements. Since September 30, 1995, the Company has raised an additional
$500,000. Cash and equivalents balances were $1.8 million as of September 30,
1995. The Company believes that it has adequate funds to support its
operations until early 1996 or, the commencement of production of the Company's
liquid nutritional products, whichever comes first. After that time, the
Company will require additional funding to support its working capital needs
as it begins to enter the market or to provide for normal operating expenses if
certification has not been achieved. The Company is presently exploring its
possible alternatives for raising additional funds. There can be no assurances
that the Company will not require additional funds earlier than set forth above
or that the Company will be able to secure the necessary financing, (or if a
source of funding is identified, that the funding will be on terms and
conditions which are acceptable to the Company).
FUNDING
Through September 30, 1995, the Company has raised approximately $2.4 million
(before offering expenses of $330,000) in additional equity financing primarily
through a private placement and this amount is reflected in accompanying
financial statements. Each unit was purchased for $50,000. A unit consisted
of 25,000 shares of common stock and warrants to purchase 12,500 shares of
common stock for $3 per share. The warrants expire two years from the date of
issuance. (Fractional units have been sold.) In addition, the Company
issued to the Placement Agent and brokers 2,500 options to acquire shares of
the Company's common stock at a price of $2.40 per share for each unit sold.
These options expire five yers from the date of issuance.
The Company has also raised $3 million (before offering expenses of $150,000)
through the issuance of Series C Preferred Stock during the third quarter and
$500,000 thereafter. The Series C Preferred Stock pays no dividends, but
imputes a 6% effective annual interest rate upon conversion into common stock
which will be accounted for over the time during which the preferred stock is
outstanding. The conversion rate is determined by the acquisition value of the
preferred stock (plus imputed interest referred to above) and an 18% discount
to the 5 day average market price of the common shares at the time of exercise.
As of September 30, 1995, approximately 29% of the Series C Preferred Stock
issued had been converted into 715,447 shares. To the extent that the Company
uses equity securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing
shareholders.
6
<PAGE> 76
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 in the Notes to Financial Statements
Item 4. Submission of Matters to a Vote of Security-Holders
The annual meeting of shareholders of the Company was held on July
27, 1995, at the Rio Hotel and Casino in Las Vegas, Nevada. At the
meeting, an election of members of the Board of Directors of the
Company was held and the following individuals (comprising the entire
membership of the Board) were elected to one year terms:
<TABLE>
<CAPTION>
MEMBER OF THE BOARD VOTES FOR VOTES AGAINST ABSTENTIONS
------------------- --------- ------------- -----------
<S> <C> <C> <C>
Craig E. Nash 8,940,454 121,607 3,354
Scott O. Nash 8,940,454 121,607 3,354
Arthur M. Berkowitz 8,940,454 121,607 3,354
Dr. Linda Carrick, Ph.D. 8,940,454 121,607 3,354
Vincent J. Casella 8,940,454 121,607 3,354
Christopher Demetree 8,940,454 121,607 3,354
Lee Allen Hooker 8,940,454 121,607 3,354
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1.0 Certificate of Incorporation (as amended)
(b) Reports on Form 8-K
None
7
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN LABORATORIES, INC.
Date: November 13, 1995 By: /s/ CRAIG E. NASH
------------------------------
Craig E. Nash
Chief Executive Officer
Chairman, Board of Directors
By: /s/ SCOTT E. HILLEY
------------------------------
Scott E. Hilley
Vice President, Finance
8
<PAGE> 1
EXHIBIT 1A
Offer Expires March 15, 1996 at 5:00 p.m., New York Time
________________________________________________________________________________
LETTER OF TRANSMITTAL
Crown Laboratories, Inc. Will Assist
You in Completing This Form
LETTER OF TRANSMITTAL TO TENDER AND EXERCISE WARRANTS
OF
CROWN LABORATORIES, INC.
Tendered Pursuant to Offer,
dated February 15, 1996
TO: Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, Nevada 89119
Attention: Scott E. Hilley,
Vice President-Finance
_________________________
Delivery of this instrument to an address other than as set forth
above does not constitute a valid delivery.
Please SIGN where indicated on page 7 and provide the information
required (including signature guarantee if applicable).
Please provide the information required on page 7, as applicable, and
enclose your Warrants and required check.
Please return this Letter of Transmittal and Warrants and required
check to Crown (see above).
SEE INSTRUCTIONS ON PAGE 8
<PAGE> 2
DESCRIPTION OF THE WARRANTS TENDERED AND EXERCISED
(Attach additional list if necessary)
(See Instruction 1)
<TABLE>
<CAPTION>
Number of Warrants Number of Warrants
Certificate Represented by Tendered and Exercised
Number(s) Certificates Certificates*
---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Print Name(s) and Addresses of
Registered Holder(s). Please
fill in if blank.
---------------------- ---------------------- -----------------------
-------------------------------
-------------------------------
------------------------------- ---------------------- ---------------------- -----------------------
-------------------------------
-------------------------------
-------------------------------
------------------------------- ---------------------- ---------------------- -----------------------
Number of Warrants Tendered and Exercised: _______________________
</TABLE>
Note: If additional space is required, attach a signed schedule.
________________________
* If you desire to tender and exercise less than the full number of
Warrants which are evidenced by any certificate listed above, please
indicate in this column the number of the Warrants you wish to tender
and exercise. Otherwise, the entire number of the Warrants evidenced
by such certificates will be deemed to have been tendered and
exercised. You must tender and exercise at least 60% of the Warrants
you hold to accept the Offer,
The undersigned hereby tenders to Crown Laboratories, Inc. ("Crown"),
Crown's Warrants (the "Warrants") described above and simultaneously exercises
such Warrants, upon the terms and conditions set forth in Crown's Offer, dated
February 15, 1996 (the "Offer"), and herein. The undersigned acknowledges
receipt of and has read the contents of the Offer as contained in the Offer,
dated February 15, 1996.
Subject to the issuance of the Common Stock underlying such Warrants
and extending the expiration date by one year of the balance of the Warrants
not tendered and exercised, the undersigned hereby sells, assigns and transfers
to Crown, or its order, all right, title and interest in the Warrants hereby
tendered to Crown and simultaneously exercises such Warrants and irrevocably
constitutes and appoints Crown and/or any person to whom such Warrants are
transferred pursuant to the order of Crown, the true and lawful
attorney-in-fact of the undersigned, with full power of substitution, to
deliver and exercise such Warrants, together will all accompanying evidence of
authority, to or upon the order of Crown and to effect the transfer and
exercise of said Warrants on the books of Crown. The undersigned represents
that the undersigned has authority to tender and
-2-
<PAGE> 3
exercise the tendered Warrants and that such sale will convey good and
unencumbered title thereto, free and clear of all liens, charges and
encumbrances and not subject to any adverse claims.
Please mail the Common Stock issued upon exercise and tender of the
Warrants and amendments to the Warrants being extended and certificate(s) for
any Warrants not accepted pursuant to the Offer to the undersigned at the
address specified below the signature of the undersigned.
The undersigned understands that Crown is not obligated to accept any
tender and exercise until receipt by Crown of the certificate(s) for Warrants,
together with this Letter of Transmittal ("Letter of Transmittal"), or a
facsimile thereof, the required check made payable to "Crown Laboratories,
Inc." for the full purchase price of the Warrants being tendered and exercised
(see Instruction 7), and all accompanying evidence of authority. Delivery by
Crown to or upon the order of Crown of the Existing Warrants being purchased by
Crown shall be conclusive as to due performance of all conditions necessary to
make this Letter of Transmittal effective.
The undersigned recognizes that under certain circumstances described
in the Offer, Crown may not be required to accept any or all of the Warrants
tendered and exercised hereby. In that event, the undersigned understands that
certificate(s) for Warrants not accepted will be returned to the undersigned.
All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned, and all obligations to the
undersigned hereunder shall be binding upon the heirs, personal
representatives, successors or assignees of the undersigned.
EACH WARRANT HOLDER MUST INITIAL THE LINES BELOW WHICH ARE APPLICABLE
TO HIM OR HER. IF NONE OF THE LINES IN ITEMS I, II, OR III ARE CHECKED, A
SPECIAL QUESTIONNAIRE WILL BE SENT.
ITEM I
ALL WARRANT HOLDERS QUALIFYING AS ACCREDITED INVESTORS MUST INITIAL ONE OR MORE
OF THE FOLLOWING THREE STATEMENTS WHICH ARE TRUE:
____ A. I certify that I am an accredited investor because I
had individual income (exclusive of any income attributable to my spouse) of
more than $200,000 in each of the more recent two years and I reasonably expect
to have an individual income in excess of $200,000 for the current year. (See
Definitions.)
____ B. I certify that I am an accredited investor because I
and my spouse had joint income of more than $300,000 in each of the most recent
years and I reasonably expect to have such joint income with my spouse in
excess of $300,000 for the current year. (See Definitions.)
____ C. I certify that I am an accredited investor because I
have an individual net worth, or my spouse and I have a combined net worth, in
excess of $1,000,000. (See Definitions.)
-3-
<PAGE> 4
ITEM II
PARTNERSHIPS, CORPORATIONS OR TRUSTS WHICH QUALIFY AS ACCREDITED INVESTORS MUST
INITIAL ONE OR BOTH OF THE FOLLOWING STATEMENTS WHICH ARE TRUE:
____ A. On behalf of the entity, I hereby certify that the
entity (i) if a corporation, business trust or partnership not formed for the
purpose of acquiring the Warrants or underlying Common Stock of Crown has total
assets in excess of $5,000,000, or (ii) if a trust not formed for the purpose
of acquiring the Warrants or underlying Common Stock of Crown, has total assets
in excess of $5,000,000 and the trustee has such experience in financial and
business matters that the trustee is capable of evaluating the merits and risks
of the investment in Crown. (For purposes of this provision only, general
partnerships may aggregate the net worth of their partners to qualify as an
accredited investor and each general partner should complete a Special
Questionnaire available upon request.) (Trustees of trusts may be requested to
complete a Special Questionnaire.)
____ B. On behalf of the entity, I hereby certify that all of
the beneficial owners of equity in the Warrantholder qualify as accredited
investors. Trusts may qualify under this provision only if the trust may be
amended or revoked by the grantor(s), each of whom qualifies as an accredited
individual investor. For purposes hereof, Individual Retirement Accounts (IRA)
for a person who is an "accredited investor" is itself an accredited investor.
(Entities attempting to qualify under this Item should have each beneficial
owner or grantor complete a Special Questionnaire.)
ITEM III
EMPLOYEE BENEFIT PLANS WITHIN THE MEANING OF TITLE I OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974 WHICH QUALIFY AS ACCREDITED INVESTORS MUST INITIAL
ONE OR MORE OF THE FOLLOWING STATEMENTS WHICH ARE TRUE:
____ A. The Warrantholder is such an employee benefit plan
with total assets in excess of $5,000,000.
____ B. The Warrantholder is a self-directed employee benefit
plan with the investment decisions made solely by persons who are accredited
investors. (Warrantholders who qualify under this Item should have each person
making the investment decisions on behalf of the plan complete a Special
Questionnaire.)
____ C. The Warrantholder is an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of 1974,
and the investment decision is made by a plan fiduciary, as defined in Section
3(21) of such Act, which is either a bank, savings and loan association,
insurance company or registered investment adviser.
-4-
<PAGE> 5
ITEM IV
ALL ACCREDITED INVESTORS MUST INITIAL THE FOLLOWING APPROPRIATE ALTERNATIVE
RESPONSE:
My individual net worth,
____ EXCEEDS - or - _____ DOES NOT EXCEED
Initial Initial
Here Here
10 times the aggregate value of the Common Stock for which I will be acquire in
the Offer.
-5-
<PAGE> 6
DEFINITIONS:
For purposes hereof, individual income means adjusted gross income, as
reported for federal income tax purposes, less any income attributable to a
spouse or to property owned by a spouse, increased by the following amounts
(but not including any amounts attributable to a spouse or to property owned by
a spouse): (i) the amount of any tax exempt interest income received, (ii) the
amount of losses claimed as a limited partner in a limited partnership, (iii)
any deduction claimed for depletion, (iv) amounts contributed to an IRA or
Keogh retirement plan, (v) alimony paid and (vi) any amount by which income
from long-term capital gains has been reduced in arriving at adjusted gross
income pursuant to the provisions of Section 1202 of the Internal Revenue Code.
For purposes hereof, joint income shall be determined as set forth above for
individual's income, except any income attributable to a spouse or property
owned by a spouse shall be included.
For purposes hereof, "net worth" means the excess of total assets at
fair market value, including home and personal property, over total
liabilities.
-6-
<PAGE> 7
GUARANTEE OF SIGNATURE(S)
IF REQUIRED
(See Instruction 3)
Firm:___________________________________________________________________________
(Please stamp, type or print)
Title:__________________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
(Zip Code)
DATE AND SIGN HERE
__________________________________________________________________________, 1996
(Please date)
________________________________________________________________________________
________________________________________________________________________________
Signature(s) of Owner(s)
Area Code and Tel. No._________________________
(Signature Guaranteed, if required)
(See Instruction 3)
________________________________________________________________________________
Taxpayer Identification or Social Security Nos.
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) or by person(s) authorized to become registered holder(s) by
certificates and documents transmitted. (See Instruction 2)
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________________
(Zip Code)
-7-
<PAGE> 8
INSTRUCTIONS
PLEASE COMPLY WITH THE FOLLOWING PROVISIONS
These instructions form part of the terms and conditions of the Offer.
1. Fill in the information describing the certificate(s) for your
Warrants in the beginning of this letter and enclose the certificate(s) for
your Warrants.
2. This Letter of Transmittal or a facsimile thereof must be
signed and dated by the registered holder(s), or person(s) authorized to become
registered holder(s) of the Warrants tendered. If signed by an executor,
administrator, trustee, guardian, attorney-in-fact, corporate officer or person
acting in a fiduciary or representative capacity, enclose proper documentary
evidence of the appointment and authority of such person so to act. The
adequacy of such evidence must be established to the satisfaction of Crown. If
a Warrant is in the name of more than one holder, each person named in the
Warrant must sign. Signature(s) must correspond exactly to the name(s) in the
Warrant(s) or instruments of transfer. If any tendered Warrants are registered
in different ways on different Warrants, it will be necessary to complete, sign
and submit as many separate Letters of Transmittal as there are different
registrations of Warrants.
3. If the Letter of Transmittal is signed by the registered
holder of the Warrants being tendered, a signature guarantee is not required
and the tendered Warrant should not be endorsed. If the Letter of Transmittal
is signed by other than the registered holders of the Warrants being tendered,
the tendered Warrants must be properly endorsed or accompanied by a properly
executed stock power, and the signature(s) thereon (as well as on the Letter of
Transmittal as provided in this Instruction 3), must be guaranteed by a
commercial bank, savings and loan association or trust company having a branch
or agency in the United States or by a member of any national securities
exchange or the National Association of Securities Dealers, Inc. (collectively
"Eligible Institutions").
4. In sending Warrants, the Letter of Transmittal and the
required check to Crown, registered mail, properly insured, is recommended
since the risk of loss in transit is yours even if the enclosed return envelope
is used. The Warrants, Letter of Transmittal and required check may be mailed,
addressed as indicated in the Letter of Transmittal, or delivered in person, to
Crown. Enclosed for your convenience is a return federal express envelope or
other envelope addressed to Crown.
5. To be acceptable, tenders must be received by Crown no later
than 5:00 p.m., New York Time, March 15, 1996, unless the tender and exercise
period is extended. Defective tenders received before such time, however, will
be accepted if the defects in such tenders and exercises are cured before the
expiration of the exchange period. Crown shall not be under any duty to give
notification of defects in such tenders and exercises, and it shall not incur
any liability for failure to give such notification. Crown shall have the
absolute right to reject any and all tenders and exercises and Crown's
interpretation of the terms and conditions of the Offer (including these
Instructions) will be final. Upon waiver of any irregularity, Crown may treat
and receive any such defective or irregular tender as if no such defect or
irregularity had been present. Tenders and exercises will not be deemed to
have been made until all such irregularities have been cured or waived.
-8-
<PAGE> 9
6. Crown is not obligated to accept any alternative, conditional
or contingent tenders and exercises.
7. Checks for the full exercise price (at $1.375 per share of
Common Stock being acquired) upon the tender and exercise of the Warrants, must
accompany the Letter of Transmittal.
-9-
<PAGE> 10
FOR USE OF CROWN ONLY
<TABLE>
<CAPTION>
Number of Number of Number of Shares Number of Number of
Date Warrants Warrants of Common Stock Warrants Warrants
Received Tendered Accepted Issued Returned Extended
-------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
___________________________
CROWN LABORATORIES, INC.
6780 Caballo Street
Las Vegas, Nevada 89119
Telephone Number: (702) 696-9300
Attention: Scott Hilley, Vice President-Finance
___________________________
-10-
<PAGE> 1
EXHIBIT 2(a)
[LOGO]
CROWN
LABORATORIES, INC.
February 14, 1996
Dear Warrantholder:
As you know, some time ago, Crown Laboratories began a course to build a
company with significantly different products that would enable it to
successfully compete in a $4 billion industry growing at an annual rate of
over $300 million. Rather than follow a conventional route that may have
brought the company to the marketplace a little sooner, Crown blazed a trail
that, in our opinion, should earn it long-standing recognition and profitable
success.
Crown appreciates your confidence and your patience as we move to the next
level of operation (we expect to have additional news to report soon). To
that end, we are pleased to offer the opportunity to increase your stock
position in Crown Laboratories by exercising your warrants at a price below
their original terms and below the current American Stock Exchange market price
on February 14, 1996.
A summary of the terms is as follows:
- Each warrant can be exercised at $1.375/share.
- A minimum of 60% of your warrants must be exercised; however, you may
exercise all 100%.
- Any remaining balance of your unexercised warrants will be extended
one additional year beyond the original agreement of your warrants.
- The offer expires in thirty days, and all checks made payable to
Crown Laboratories, Inc. must be received in the Las Vegas office by
March 31, 1996.
For a complete disclosure of all the terms and conditions of this offer, please
read the enclosed document.
A prepaid FedEx envelope is provided for your convenience.
ANY WARRANT HOLDER WHO DOES NOT TAKE ADVANTAGE OF THIS OPPORTUNITY SIMPLY
CONTINUES TO ABIDE TO THEIR ORIGINAL WARRANT AGREEMENT.
I look forward to sharing more news with you in the very near future. If you
have any questions, please contact Lawrence Rosenthal at (610) 667-4448.
Sincerely,
Craig E. Nash
Chairman & CEO
6780 CABALLO STREET
LAS VEGAS, NEVADA 89119
(702) 696-9300
Fax: (702) 696-0769
