<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1996
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.
(Name of small business issuer in its charter)
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 June 30, 1996 Common Stock, $.001 par value - 16,644,981.
<PAGE> 2
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 limited
sales of dry mix products in the fourth quarter of 1995. For the three month
period ended June 30, 1996, the Company incurred losses of ($1,034,877) vs.
($762,452) in the same period in 1995. The increased loss is due to additional
salary expense and operating and start-up expenses associated with the
Company's entry into the market. The accumulated consolidated deficit at June
30, 1996 was ($9,727,607) while shareholders' equity was $6,589,649. Losses
have continued since such date due primarily to expenditures for salaries,
plant start-up and other operating expenses.
The Company received the F.D.A.'s approval of its aseptic processing and
packaging equipment on June 25, 1996. There was a panel of six different
bacteriological kill tests that had to be passed to file with the F.D.A. They
measured the machinery's recording devices' ability to collect and record
information from the pre-sterilization process, (both process and packaging
related), and continue data collection during actual manufacturing, assuring
that complete compliance with aseptic manufacturing guidelines is maintained.
After the test samples were prepared, they were incubated for a 21 day period
and, when the test results were favorable, the Process Authority summarized the
results of the tests, combined it with a systems audit (review of machinery,
manuals and operating safeguards) and presented their findings to the F.D.A. on
the Company's behalf. The Process Authority has also submitted a description of
the low-acid aseptic processing system, the aseptic filler manual and a piping
diagram for the entire production and packaging system as required by the F.D.A.
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 a claim against the
manufacturer of the aseptic filler 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 certain persons and entities involved with the
manufacturer. 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. Even though the
machinery has been certified, there can be no assurances regarding 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.
The Company has entered into agreements with certain employees which provide for
the grant of common stock and stock options (at an 85% discount to market price
as of their date of employment) which vest over a five year period.
Additionally, the Company entered into consulting agreements for investor
relations and public relations services which provide for the issuance of 30,000
options to purchase the Company's common stock at an 85% discount to the market
price of the stock and 100,000 options to purchase the Company's shares at the
market price on the dates of signing the respective agreements. Compensation
expense relating to these common stock and option grants is approximately
$37,000 for the three months ended June 30, 1996.
Additionally, the Company has entered into a consulting agreement which
provides for customer introductions to major potential purchasers of the
Company's products in return for a fixed cash fee of $30,000. $10,000 was
paid against this contract in the quarter ended June 30, 1996.
2
<PAGE> 3
FINANCIAL CONDITION
Working capital at June 30, 1996 was ($1,194,534) with approximately $700,000 in
accounts payable attributable to capital expenditures and leasehold
improvements. Cash and cash equivalent balances were $459,709 as of June 30,
1996. Based on the additional funding the Company has secured, (discussed in
"Funding Section", below), the Company believes that it has adequate funds to
support its operations into 1997.
Based upon various factors discussed herein, the Company's independent public
accountants have modified their report on the Company's financial statements in
the Company's 1995 Form 10-KSB/A1 to indicate that there is no longer a
substantial doubt about the ability of the Company to continue as a going
concern.
FUNDING
The Company has received a $4.5 million term loan from a lender with $3 million
advanced to the Company upon closing. See Note 7 to the financial statements,
"Subsequent Events" for additional details.
On July 31, 1996, the Company raised $1 million through the sale of its Series
E Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's common stock on the "Dividend Dates", (August 31, 1997 and August
31, 1998). The Series E Preferred Stock is convertible into common shares
based on discounts to the market price at the time of conversion which range
from 15% to 31% depending on the time they are held from the issuance date,
(the longer the stock is held, the deeper the discount).
On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for the over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000. Each unit consists of 30,000 shares
of the Company's common stock and 30,000 warrants to purchase the Company's
common stock at a price of $1.60 for a period of six months after the final
closing of the placement. As of June 28, 1996, the Company raised $708,750
through the private placement (partial units have been sold). The Company
extended the private placement's expiration date from June 28, 1996 to July 31,
1996 but has retained the right to terminate the placement at any time before
the expiration date. Since June 30, 1996, the Company has raised an additional
$1,203,750 in the private placement. The private placement was closed on July
30, 1996.
On February 15, 1996, the Company offered the holders of its warrants (issued
in conjunction with private placements in 1994 and 1995), the opportunity to
lower the exercise price of the warrants from $3.00 to $1.375 per share
provided that they exercise at least 60% of their holdings. The expiration
date of the remaining warrants, if any, would be extended for one year at the
original exercise price. This offer was extended on March 12, 1996 until March
28, 1996. A total of 613,688 warrants representing $843,821 were exercised.
During the quarter ended March 31, 1996, the Company raised an additional
$500,000 through a "Reg S" sale of its Series C Preferred Stock bringing the
total of Series C Preferred Stock issued to $4 million. 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 July 2, 1996, all of the Series C
Preferred Stock issued had been converted into 3,294,735 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.
3
<PAGE> 4
CROWN LABORATORIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS UNAUDITED AUDITED
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 459,709 $ 677,431
Accounts Receivable 30,521 60,121
Inventory
Raw & Packaging Materials 126,818 97,647
Finished Goods 11,347 11,347
Prepaid expenses & employee and
officer advances 30,015 44,509
----------- -----------
Total current assets 658,410 891,055
PROPERTY AND EQUIPMENT
Leasehold improvements 1,294,092 1,291,497
Machinery & Equipment 7,977,289 7,595,945
----------- -----------
9,271,381 8,887,442
Accumulated Depreciation & Amortization (315,292) (208,679)
----------- -----------
Net Property and Equipment 8,956,089 8,678,763
MACHINERY RIGHTS & BLUEPRINTS 184,478 184,478
DEPOSITS & DEFERRED ASSETS 248,751 232,006
----------- -----------
TOTAL ASSETS $10,047,728 $ 9,986,302
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of
long-term debt and capital lease
liabilities $ 321,098 $ 267,713
Accounts payable and accrued expenses 1,569,853 1,451,633
----------- -----------
Total current liabilities 1,890,951 1,719,346
ACCRUED SALES TAX PAYABLE 337,704 387,124
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,229,423 1,408,912
SHAREHOLDERS' EQUITY
PREFERRED STOCK -- $0.001 par value; 1,000,000 2,121,233
5,000,000 shares authorized;
100 shares outstanding in 1996
and none in 1995
COMMON STOCK -- $0.001 par value;
50,000,000 shares authorized;
16,644,981 and 14,290,513
shares outstanding
in 1996 and 1995, respectively 16,645 14,290
Additional paid-in-capital 15,309,845 12,163,600
Accumulated deficit (9,736,840) (7,828,203)
----------- -----------
Total shareholders' equity 6,589,650 6,470,921
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $10,047,728 $ 9,986,302
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
4
<PAGE> 5
CROWN LABORATORIES, INC.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ - $ - $ - $ -
Cost of Sales
----------- ---------- ----------- -----------
GROSS PROFIT - - - -
General and Administrative Expenses 1,016,870 730,434 1,912,766 1,385,404
----------- ---------- ----------- -----------
LOSS FROM OPERATIONS (1,016,870) (730,434) (1,912,766) (1,385,404)
----------- ---------- ----------- -----------
Other Income/(Expense)
Other Income 25,200 - 50,400 -
Interest expense (44,309) (42,486) (85,471) (68,896)
Interest income 1,102 10,468 5,967 28,743
----------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,034,877) (762,452) (1,941,870) (1,425,557)
Income Tax Provision - - - -
----------- ----------- ----------- -----------
NET LOSS ($1,034,877) ($762,452) ($1,941,870) ($1,425,557)
=========== =========== =========== ===========
NET LOSS PER SHARE ($0.07) ($0.06) ($0.14) ($0.12)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 14,166,236 12,528,058 14,166,236 12,528,058
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
5
<PAGE> 6
CROWN LABORATORIES, INC.
Consolidated Statements of Cash Flow
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30, 1996 June 30, 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS ($1,941,870) ($1,425,557)
ADD/(DEDUCT) ITEMS NOT IMPACTING CASH:
Depreciation and amortization 106,613 3,792
Issuance of shares to employees 79,760 47,561
and consultants
CHANGES IN ASSETS AND LIABILITIES:
(Increase)/Decrease in receivables 29,600 -
(Increase)/Decrease in inventories (29,171) (79,390)
(Increase)/Decrease in prepaid expenses 14,494 29,762
and employee advances
Increase/(Decrease) in accounts payable 118,220 878,613
and accrued expenses --------- -------
TOTAL CASH GENERATED FROM/(USED FOR) OPERATIONS (1,622,354) (545,219)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (383,939) (3,901,907)
(Increase)/Decrease in deposits and deferred assets (16,744) 804,824
Increase/(Decrease) in accrued sales taxes payable (49,419) -
TOTAL CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES (450,102) (3,097,083)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans - 750,000
Repayment of loans payable (126,104) (108,821)
Proceeds from issuance of common and 2,052,571 2,018,750
preferred stock and the exercise of warrants
Fundraising costs (71,733) (253,031)
--------- ---------
TOTAL CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 1,854,734 2,406,898
--------- ---------
Net increase/(decrease) in cash and cash equivalents (217,722) (1,235,404)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 677,431 1,826,935
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 459,709 $ 591,531
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
6
<PAGE> 7
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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 six month
periods ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Crown Laboratories, Inc. Annual Report on Form 10-KSB.
2. MANUFACTURING FACILITY
The Company presently leases a 62,000 square foot manufacturing facility in Las
Vegas, Nevada for the purpose of manufacturing its line of nutritional
products. The Company selected its Las Vegas location based on a number of
business factors. The State of Nevada does not assess either corporate or
personal income taxes and is a "right to work" state. It has favorable freight
rates resulting from the large volume of shipments into the casino trade with
Las Vegas' limited manufacturing providing little outbound trucking demand and
the climate is also very favorable for shipping on a year round basis. See
Note 5, "Commitments and Contingencies", for additional information on the
purchase of the building.
The Company received the F.D.A.'s approval of its aseptic processing and
packaging equipment on June 25, 1996. There was a panel of six different
bacteriological kill tests that had to be passed to file with the F.D.A. They
measured the machinery's recording devices' ability to collect and record
information from the pre-sterilization process, (both process and packaging
related), and continue data collection during actual manufacturing, assuring
that complete compliance with aseptic manufacturing guidelines is maintained.
After the test samples were prepared, they were incubated for a 21 day period
and, when the test results were favorable, the Process Authority summarized the
results of the tests, combined it with a systems audit (review of machinery,
manuals and operating safeguards) and presented their findings to the F.D.A. on
the Company's behalf. The Process Authority has also submitted a description of
the low-acid aseptic processing system, the aseptic filler manual and a piping
diagram for the entire production and packaging system as required by the F.D.A.
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 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 certain persons and entities involved with the
manufacturer. 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. Even though the
machinery has now been certified, there can be no assurances regarding 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.
<PAGE> 8
3. FINANCING
In July, the Company sold $1 million of its Series E Preferred Stock, see "Note
7 to the financial statements, Subsequent Events" for additional information.
On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for the over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000. Each unit consists of 30,000 shares
of the Company's common stock and 30,000 warrants to purchase the Company's
common stock at a price of $1.60 for a period of six months after the final
closing of the placement. As of June 28, 1996, the Company raised $708,750
through the private placement (partial units have been sold). The Company has
extended the private placement's expiration date from June 28, 1996 to July 31,
1996 but has retained the right to terminate the placement at any time before
the expiration date. Since June 30, 1996, the Company has raised an additional
$1,203,750 in the private placement. The private placement was closed on July
30, 1996.
On February 15, 1996, the Company offered the holders of its warrants (issued
in conjunction with private placements in 1994 and 1995), the opportunity to
lower the exercise price of the warrants from $3.00 to $1.375 per share
provided that they exercise at least 60% of their holdings. The expiration
date of the remaining warrants, if any, would be extended for one year at the
original exercise price. This offer was extended on March 12, 1996 until March
28, 1996. A total of 613,688 warrants representing $843,821 were exercised.
During the quarter ended March 31, 1996, the Company raised an additional
$500,000 through a "Reg S" sale of its Series C Preferred Stock bringing the
total of Series C Preferred Stock issued to $4 million. The entire amount of
Series C Preferred Stock issued has been converted into 3,294,735 shares of the
Company's common stock.
4. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Refer to Form 10-KSB for discussions on Significant Accounting Policies.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into a five year lease of its Las Vegas manufacturing
facility, (with an option to renew the lease for an additional five year
period), which requires monthly payments of $25,802, subject to annual
inflation escalations which commenced in September 1995. During 1995, the
Company paid $278,768 in lease payments for the building. Minimum payments due
under the building lease are as follows:
<TABLE>
<S> <C>
1996 $309,624
1997 $309,624
1998 $309,624
1999 $154,812
2000 -0-
</TABLE>
The Company's option to purchase its current manufacturing facility for
$2,700,000 has expired. The Company is presently negotiating another option
with its landlord.
The Company's option to lease a building in the Fjardo region of Puerto Rico
has expired. The Company is presently exploring other alternatives for
locating its dry mix operation in Puerto Rico.
<PAGE> 9
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 two
major contractors over the services performed. The Company's claims are for
defective workmanship, excessive charges for services rendered, claims that
charges should have been included under warranties and returns which have not
been accepted by the vendor. 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:
CROWN V. SWINNEY ET AL., the Company has sought to enforce the legends
on its stock under the Securities Act of 1933. The Court issued an
injunction, and after the injunction became moot, the court decided
that the injunction was wrongful. The Company has posted a
superscedeas bond in the amount of $89,695 secured by a certificate
of deposit to cover its potential liability in this case. As the
enforceability of the Company's legends on its securities is at stake,
the Company posted a bond and appealed the Nevada District Court's
decision. This appeal has been accepted by the Nevada Supreme Court.
Although, the Company believes that its liability, if any, will be
limited to attorney's fees, it has expensed the amount of the
preliminary judgment, approximately $64,000.
CROWN V. ROLFENADE ET AL., was filed by the Company, in March, 1995,
and subsequently amended to incorporate all of the respective "alter
egos" in September, 1995. The action is for breach of contract,
misrepresentation, fraud and alter ego. Rolfenade warranted that the
packaging machine would be in compliance with F.D.A. requirements.
The packaging machine was not in compliance with the applicable
regulations and the Company has made substantial modifications to the
filler to bring it into compliance. The Company has served all
defendants except those in Germany, which are still in the process of
being served under the Hague Convention. To date, no defendant has
answered the complaint.
After further investigation, it was determined that in the opinion of the
Company's counsel that Standard Charter Bank's claims (which have discussed in
previously-issued periodic reports) are groundless as they relate to a machine
other than the one which was purchased by the Company.
<PAGE> 10
7. SUBSEQUENT EVENTS
On July 31, 1996, the Company raised $1 million through the sale of its Series
E Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's common stock on the "Dividend Dates", (August 1, 1997 and August
1, 1998). The Series E Preferred Stock is convertible into common shares
based on discounts to the market price at the time of conversion which range
from 15% to 31% depending on the time they are held from the issuance date,
(the longer the stock is held, the deeper the discount).
After June 30, 1996, the Company raised an additional $1.2 million through a
private placement of equity securities. See Note 3 to the financial statements,
"Financing" for additional details on the private placement.
The Company entered into a term loan agreement with FINOVA Capital Corporation
which provides for a $3 million, fixed rate, (pegged at a spread of 561 basis
points above the 5 year Treasury Note rate at the time of closing), 5 year term
loan (interest only for the first six months, amortized over the remaining 54
months) secured by a first lien against the fixed assets and leasehold
improvements of the Company. The commitment provides for the advance of an
additional $1.5 million upon securing sales contracts totaling $7 million on an
annualized basis. The Loan Agreement provides that the Company maintain a
minimum tangible net worth of $5 million, a senior debt to tangible net worth
ratio of 1 to 1 and a cash flow coverage ratio of 2.0 to 1. The cash flow ratio
will not come into effect until December 31, 1997. Additionally, as part of the
terms of the loan agreement, the Company has agreed to issue 300,000, 5 year,
warrants to FINOVA to purchase the Company's common stock at the closing market
price of the stock on the date prior to the closing.
Minimum principal payments due on the loan over the next 5 years are as follows.
1996 0
1997 441,809
1998 591,225
1999 665,746
2000 749,659
Thereafter 551,561
----------
Total $3,000,000
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 in the Notes to Financial Statements
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
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: August 16, 1996 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
<PAGE> 1
EXHIBIT 1
CROWN LABORATORIES, INC.
CERTIFICATE OF DESIGNATION
OF
SERIES E PREFERRED STOCK
(Pursuant to Section 151 of the Delaware General
Corporation Law)
----------------------------
We, Scott Nash and Scott Hilley, President and Vice President Finance
respectively, of Crown Laboratories, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware, in accordance with
the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors by the
Certificate of Incorporation of the said corporation, the Board of Directors
adopted the following resolution creating a series of 300 shares of its
Preferred Stock to be a designated Series E Preferred Stock;
"WHEREAS, the Certificate of Incorporation of the Corporation
authorizes a class of stock designated Preferred Stock, comprising 5,000,000
shares (of which 999,000 shares of Series A Preferred Stock are authorized and
no shares of Series A Preferred Stock are currently outstanding; 999,000 shares
of Series B Preferred Stock are authorized and no shares are outstanding; 600
shares of Series C Preferred Stock are authorized of which no shares are
outstanding); and provides that such Preferred Stock may be divided into such
number of series as the Board of Directors may determine, and authorizes the
Board of Directors to (i) determine and alter the powers, preferences, rights,
qualifications, limitations and restrictions granted to or imposed upon any
series of Preferred Stock and (ii) fix the number of shares of any series of
Preferred Stock and the designation of such series of Preferred Stock.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, this Board of Directors hereby creates a series of Series E
Preferred Stock, par value $0.001 per share, of the Corporation, and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, and restrictions thereof (in addition to any provisions set forth
in the Certificate of Incorporation of the Corporation which are applicable to
the Preferred Stock of all classes and series) as follows:
-1-
<PAGE> 2
SERIES E PREFERRED STOCK
1: Designation and Amount. The shares of such series shall be
designated as "Series E Preferred Stock" (the "Series E Preferred Stock") and
the number of shares constituting the Series E Preferred Stock shall be 300.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, that no decrease shall reduce the number of shares of
Series E Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise
of outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series E
Preferred Stock.
2: Rank. The Series E Preferred Stock shall rank: (i) prior to all
of the Corporation's Common Stock, par value $0.001 per share ("Common Stock")
and the Corporation's Series B Preferred Stock, par value $0.001 per share
(collectively the "Junior Securities"); and (ii) (subject to the provisions of
Section 8 hereof) on parity with any class or series of capital stock of the
Corporation hereafter created specifically ranking by its terms on parity with
the Series E Preferred Stock (collectively "Parity Securities"); and (iii)
(subject to the provisions of Section 8 hereof) junior to Series A Preferred
Stock, $0.001 par value, Series C Preferred Stock, $0.001 par value or any
class or series of capital stock of the Corporation hereafter created
specifically ranking higher than the Series E Preferred Stock ("Senior
Securities"), in each case as to distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary
(all such distributions being referred to collectively as "Distributions").
3: Dividends. The Series E Preferred Stock is entitled to receive
cumulative dividends at the annual rate of Six Hundred Dollars ($600) per share
and no more, payable in one yearly installment in the form of shares of the
Company's Common Stock based on the Market Price as of the dividend date on the
1st day of August of each year (but only for the first two years after
issuance) commencing on August 1, 1997, when and as declared by the Board of
Directors provided, however, unless otherwise prohibited by the Delaware
Corporations Code, the Board of Directors shall timely declare and have the
corporation pay such dividends. All such dividends shall accrue from the date
of issuance whether or not earned so that no dividends or other distributions
shall be made with respect to the Common Stock or the Series B Preferred Stock,
and no Common Stock or Series B Preferred Stock shall be purchased or redeemed
until cumulative dividends on the Series E Preferred Stock, for all past
dividend
-2-
<PAGE> 3
periods and for the then current year dividend period shall have been declared
and paid or set apart. The Market Price shall be the average closing sale
prices for the Common Stock of the Company for the five (5) trading days
immediately preceding the dividend date; as reported by the American Stock
Exchange (the "AMEX"), or if not quoted on the AMEX, on the principal stock
exchange or NASDAQ, where the Company's Common Stock trades. After cumulative
dividends on the Series E Preferred Stock and for the then current year
dividend period shall have been declared and paid or set apart, if the Board of
Directors shall elect to declare additional dividends out of funds legally
available therefore, such additional dividends may be declared on the Common
Stock.
4: Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, the holders of shares
of Series E Preferred Stock shall be entitled to receive, immediately after
any distributions to Senior Securities required by the Corporation's
Certificate of Incorporation or any certificate of designation of preferences,
and prior and in preference to any distribution to Junior Securities but in
parity with any distribution to Parity Securities, an amount per share equal to
the sum of (i) $10,000 for each outstanding share of Series E Preferred Stock
(the "Original Series E Issue Price") and (ii) an amount equal to 6% of the
Original Series E Issue Price for each 12 months that has passed since the date
of issuance of any Series E Preferred Stock (such amount being referred to
herein as the "Premium"). If upon the occurrence of such event and after
payment to the Senior Securities, the assets and funds thus distributed among
the holders of the Series E Preferred Stock and Parity Securities shall be
insufficient to permit the payment to such holders of the full preferential
amounts due to the holders of the Series E Preferred Stock and the Parity
Securities, respectively, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders of
the Series E Preferred Stock and the Parity Securities, pro rata, based on the
respective liquidation amounts to which each such series of stock is entitled
by this Certificate of Incorporation and any certificate of designation of
preferences.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Corporation, they shall be distributed
to holders of Junior Securities in accordance with the corporation's Certificate
of Incorporation or any certificate of designation or preferences.
-3-
<PAGE> 4
(c) A consolidation or merger of this Corporation
with or into any other corporation or corporations, or a sale, conveyance or
disposition of all or substantially all of the assets of this corporation or
the effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this Section 4, but shall instead be treated pursuant to
Section 6 hereof.
5. Conversion. The holders of the Series E Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series E
Preferred Stock shall be convertible, subject to the Corporation's rights of
redemption set forth in Section 6, at the option of the holder thereof, at any
time after 60 days following the date of issuance of the last of such shares at
the office of the Corporation or any transfer agent for the Series E Preferred
Stock, into that number of fully-paid and non-assessable shares of Common Stock
calculated in accordance with the following formula:
($10,000)
--------------------------
Conversion Price per share
Conversion
Price = X% of the average closing sale prices (or if none, the average
of the bid and asked prices) for the three (3) trading days
immediately preceding the Date of Conversion; as reported by
the American Stock Exchange (the "AMEX"), or if not quoted on
the AMEX, on the principal stock exchange or NASDAQ, of the
Corporations' Common Stock, (the "Closing Sale Price");
provided, however, if the Closing Sale Price is less than
$0.75 per share of Common Stock, the Conversion Price per
share shall equal Closing Sale Price. X shall be the
following percentages based on the number of days which have
elapsed from the date of issuance of said share of Series E
Preferred Stock
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Number of Days Elapsed Percentage
---------------------- ----------
<S> <C>
60 - 89 85%
90 - 119 81%
120 - 149 75%
150 - 179 73%
180 and beyond 69%
</TABLE>
The number of shares of Common Stock into which each share of Series E
Preferred Stock may be converted is hereinafter referred to as the "Conversion
Rate" for such series.
Upon any Conversion of Series E Preferred Stock accrued but unpaid
dividends shall be disregarded and waived.
(b) Mechanics of Conversion. No fractional shares
of Common Stock shall be issued upon conversion of Series E Preferred
Stock. In lieu of any fractional shares to which the holder would otherwise be
entitled, the Corporation shall round up to the nearest whole share. In the
case of a dispute as to the calculation of the Conversion Rate, the
Corporation's calculation shall be deemed conclusive absent manifest error. In
order to convert Series E Preferred Stock into full shares of Common Stock, the
holder shall surrender the certificate or certificates therefor, duly endorsed,
by overnight courier to the office of the Corporation or of any transfer agent
for the Series E Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same, the number of
shares of Series E Preferred Stock so converted and a calculation of the
Conversion Rate (with an advance copy of the certificate(s) and the notice by
facsimile); provided, however, that the Corporation shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless either the certificates evidencing such shares of Series E
Preferred Stock are delivered to the Corporation or its transfer agent as
provided above, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates.
The Corporation shall use reasonable efforts to issue and delivery
within five (5) business days after delivery to the Corporation of such
certificates, to such holder of Series E Preferred Stock at the address of the
holder on the stock books of the Corporation, a certificate or certificates for
the number
-5-
<PAGE> 6
of shares of Common Stock to which he shall be entitled as aforesaid. The date
on which notice of conversion is given (the "Date of Conversion") shall be
deemed to be the date set forth in such notice of conversion provided that the
original shares of Series E Preferred Stock to be converted are received by the
Corporation or transfer agent, if any, for the Series E Preferred Stock within
five business days thereafter and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date. If the original shares of Series E Preferred Stock to be converted are
not received by the Corporation or such transfer agent, if any, within five
business days after the Date of Conversion, the notice of conversion shall
become null and void.
(c) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation but will at all times
in good faith assist in the carrying out of all the provisions of this Section 5
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Series E Preferred Stock
against impairment.
(d) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series E Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of the Series E Preferred Stock; and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Series E Preferred Stock, the Corporation will take such corporate action
as may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(e) Automatic Conversion. On the second annual anniversary of
the issuance of each share of Series E Preferred Stock, each share of Series E
Preferred Stock shall automatically convert into fully-paid and non-assessable
shares of Common Stock at a Conversion Rate for each share of Common Stock
calculated in accordance with the formula in Paragraph 5(a) above, but expressed
as a document.
-6-
<PAGE> 7
6. Redemption
(a) Right to Redeem. The Corporation shall have the
right, in its sole discretion to redeem in whole or in part, any shares of
Series E Preferred Stock. If the Corporation elects to redeem some but not all
the shares outstanding, the shares shall be redeemed on a pro rata basis.
(b) Mechanics of Redemption. The Corporation shall
effect each such redemption by giving notice of its election to redeem,
by facsimile with a copy by 2-day courier, to the holder of shares of Series E
Preferred Stock at the address and facsimile number of such holder appearing in
the Corporation's register for the Series E Preferred Stock. Such redemption
notice shall indicate whether the Corporation will redeem all or part of the
shares of Series E Preferred Stock and the applicable redemption price. The
Corporation shall not be entitled to send any notice of redemption and begin
the redemption procedures unless it has the full amount of the redemption
price, in cash or liquid assets, available in demand or other immediately
available account in a bank or similar financial institution on the date the
redemption notice is sent to shareholders.
The redemption price per share of Series E Preferred Stock shall be
calculated in accordance with the following formula:
$10,000
--------------------------
X
For the purposes of the above formula "X" shall equal the applicable
percentage as set forth in Section 5(a) above.
The redemption price shall be paid to the holder of shares of Series E
Preferred Stock redeemed within 10 business days of the delivery of the notice
of such redemption to such holder; provided, however, that the Corporation
shall not be obligated to deliver any portion of such redemption price unless
either the certificates evidencing the shares of Series E Preferred Stock
redeemed are delivered to the Corporation or its transfer agent as provided in
Section 5, or the holder notifies the Corporation or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. Upon any redemption any
accrued but unpaid dividends shall be disregarded and waived.
-7-
<PAGE> 8
7. Corporate Change. The Closing Sale Price used to determine the
Conversion Price shall be appropriately adjusted to reflect as deemed equitable
and appropriate by the Corporation, any stock dividend, stock split or share
combination of the Common Stock. In the event of a merger, reorganization,
recapitalization or similar event of or with respect to the Company (a
"Corporate Change") (other than a Corporate Change in which all or
substantially all of the consideration received by the holders of the Company's
equity securities upon such Corporate Change consists of cash or assets other
than securities issued by the acquiring entity or any affiliate thereof), the
Series E Preferred Stock shall be assumed by the acquiring entity and
thereafter this Series E Preferred Stock shall be convertible into such class
and type of securities as the holder would have received had the holder
converted this Series E Preferred Stock immediately prior to such Corporate
Change.
8. Voting Rights. The holders of Series E Preferred Stock will not
have any voting rights except as set forth below or as otherwise from time to
time required by law.
The affirmative vote of consent of the holders of at least a majority
of the outstanding shares of the Series E Preferred stock, voting separately as
a class, will be required for any amendment, alteration or repeal of the
Corporation's Certificate of Incorporation if, and only if, the amendment,
alteration or repeal adversely affects the powers, preferences or special
rights of the Series E Preferred Stock.
To the extent that under Delaware law the vote of the holders of the
Series E Preferred Stock, voting separately as a class, may be required to
authorize a given action of the Corporation, the affirmative vote or consent of
the holders of at least a majority of the outstanding shares of the Series E
Preferred Stock shall constitute the approval of such action by the class. To
the extent that under Delaware law the holders of the Series E Preferred Stock
are entitled to vote on a matter with holders of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock, voting together as one class, each share of Series E
Preferred Stock shall be entitled to a number of votes equal to the number of
shares of Common Stock into which it is then convertible using the record date
for the taking of such vote of stockholders as the date as of which the
Conversion Price is calculated. Holders of the Series E Preferred Stock shall
be entitled to notice of all shareholder meetings or written consent with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's by-laws and applicable statutes.
-8-
<PAGE> 9
9. Protective Provisions. So long as shares of Series E Preferred
Stock are outstanding, this Corporation shall not take any action that would
impair the right of the holders of the Series E Preferred Stock to exercise the
conversion rights set forth herein and shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the outstanding shares of Series E Preferred Stock:
(a) create any new class or series of stock
having a preference over, or being on a parity with, the Series E Preferred
Stock with respect to Distributions (as defined in Section 2 above); or
(b) do any act or thing which would result in
taxation of the holders of shares of the Series E Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended).
10. Status of Redeemed or Converted Stock. In the event any shares
of Series E Preferred Stock shall be converted or redeemed pursuant to Section
5 or Section 6 hereof, the shares so converted or redeemed shall be cancelled
and shall not be reissuable by the Corporation.
IN WITNESS WHEREOF, Crown Laboratories, Inc. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Scott Nash,
its President, and attested by Scott Hilley, its Vice President, Finance, this
26th day of July 1996.
By: /s/ Scott Nash
_____________________
Scott Nash,
President
Attest:
By: /s/ Scott Hilley
_____________________________________
Scott Hilley, Vice President Finance
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENTS
OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB
DATED JUNE 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 459,709
<SECURITIES> 0
<RECEIVABLES> 30,521
<ALLOWANCES> 0
<INVENTORY> 126,818
<CURRENT-ASSETS> 658,410
<PP&E> 9,271,381
<DEPRECIATION> (315,292)
<TOTAL-ASSETS> 10,047,728
<CURRENT-LIABILITIES> 1,890,951
<BONDS> 0
0
1,000,000
<COMMON> 16,645
<OTHER-SE> 5,589,650
<TOTAL-LIABILITY-AND-EQUITY> 10,047,728
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,912,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (85,471)
<INCOME-PRETAX> (1,941,870)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,941,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,941,870)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
