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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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 ACT
OF 1934 (NO FEE REQUIRED)
For the period from to
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Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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:
Not Applicable
Check whether the issuer (1) filed all the 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 such filing requirements for the past 90 days.
Yes X No
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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-KGB
or any amendment to this form 10-KSB. Yes No X
-----
State issuer's revenue for the most recent fiscal year: $80,100
The aggregate value of the Common Stock held by non-affiliates on
December 31, 1995 was $17,416,514. As of December 31, 1995 there were 14,290,513
shares of Crown Laboratories, Inc. Common Stock, $.001 par value outstanding.
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PART I
Item 1. DESCRIPTION OF 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, are flavorful, easily digestible and nutritionally complete.
The Company's products will be provided in aseptically-sealed, ready-to-drink
packages. Product formulations are designed to provide a maximum in nutrient and
caloric support in easily consumable forms. The Company currently intends to
offer four liquid nutritional products, 26 dry-mixed products for use by
individuals with dietary restrictions, including low sodium and diabetic diets,
as well as two water products (sterile water and normal saline) used for medical
irrigation applications.
The Company's liquid nutritional product line will consist of both standard
products for nursing homes (nutritional supplements and milkshake-type products
in a variety of flavors) as well as specialized products targeted towards
patients with kidney dysfunction and tube feeding needs.
RECENT SIGNIFICANT DEVELOPMENTS
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 "F.D.A."). The commissioning process began on April 13,
1995 with the Company, working with the National Food Laboratories, (the Process
Authority), to review its manufacturing equipment, manufacturing procedures and
operating manuals and monitor the bacteriological kill tests for compliance with
applicable federal regulations. The National Food Laboratories is an
international food and research and development organization with laboratory
facilities in Dublin, California; Washington, D.C.; and Seattle, Washington and
is a wholly-owned subsidiary of the National Food Processors Association.
There is a panel of six different bacteriological kill tests that must be passed
to file with the F.D.A. They measure 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 are prepared, they are
incubated for a 21 day period and, if the test results are favorable, the
Process Authority summarizes the results of the tests and combines it with their
systems audit (review of machinery, manuals and operating safeguards) 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. The Process Authority has
confirmed that the Company has passed four of the panel of six sterility tests
with the results of the remaining tests due by April 18, 1996. On April 12,
1996, the Process Authority and the Company provided the F.D.A. with a
preliminary submission of documentation pertinent to the filing of Company's
system including a description of the low-acid aseptic processing system, the
aseptic filler manual and a piping diagram for the entire production and
packaging system. Provided that the results of the ongoing bacteriological tests
are favorable, the Process Authority is targeting its efforts towards completing
the filing form and supporting documentation by April 19, 1996.
Except for the historical information contained herein, the matters discussed
are forward looking statements that involve risks and uncertainties, including
whether the Process Authority will be able to confirm Crown's findings of
sterility or the time needed to complete any of such testing and when the
filings are completed with the F.D.A., the reaction of the F.D.A. or when the
F.D.A. will react.
THE MARKET
The need and demand for nursing home services are increasing as a direct result
of the overall aging of the United States population. The result of this longer
life span has been an increase in the number of people with debilitating
conditions that make the tasks of day-to-day living difficult to achieve, and an
overall change in the demographics of the U.S. population. In relative terms,
the fastest growing segment of the population is individuals over the age of 85.
This group has tripled since 1960 and is expected to double again over the next
20 years.
The nursing home industry has been a primary beneficiary of this demographic
shift to the point where it represented $69.6 billion, or 7.9% of the total
personal healthcare dollars spent in the United States in
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1993. Presently, there are approximately 20,000 nursing homes in the United
States with an average of 100 beds per nursing home. Today, the nursing home
industry is a multi-billion 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 changed dramatically in the past 10 years.
Nursing homes are now complex institutions caring for people who, because of
severe incapacities, need both sub-acute 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 Medicare programs, with the
remaining 35% paid for by private insurance or individuals. 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 of the nursing home population
receives a liquid supplement at least two times per day.
PRODUCTS
The Company has developed and intends to market the following products:
LIQUID PRODUCTS. Upon completion of its manufacturing facility, the Company
will offer a line of liquid specialty dietary-control products in an
aseptic liquid packaged form in a variety of flavors.
WINLAC(TM) - A Complete Supplement. WinLac is a lactose-free
nutritional supplement which fulfills the general supplementation
requirements of a 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 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 the necessary preparation and
clean up. The Company's anticipated production efficiencies and
proprietary formulation permit MultiCal to be sold to healthcare
facilities at a cost which is often less than that of a scratch
preparation milk shake.
RENALITE(TM) - Kidney-Deficient Product. Renalite is specifically
designed as a food supplement for use by patients with decreased kidney
function. Decreased kidney function limits the amount of fluids, salt
and proteins that can be consumed and eliminated by the body. Renalite
is a liquid formulation designed as a food supplement containing both
high caloric intake and the necessary vitamins and minerals. Other
product benefits include limited volume of fluid devoid of 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 Product. The Company's tube-feeding
product, Entralite, will be provided in a ready-to-use enclosed tube
feeding system designed to give complete nutritional
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support to patients unable to consume solid food by mouth. Three
concentrated 750ml packages are designed to supply 1,600 calories plus
all the vitamins and minerals normally required for a patient. The
Company believes that doctors specify 1,500 calories for patients
approximately 93% of the time. Entralite packages will be specially
designed with a bib fitting to facilitate attachment to the feeding
tube which delivers product directly to the stomach.
DRY-MIX PRODUCTS. The Company has developed 26 dry-mix products to be used
for protein enhancement, caloric enhancement, low sodium and sugar free
diets of the geriatric population. These dry-mix products have been test
marketed and clinically tested . The Company's dry-mix nutritional
products, packaged in form, fill and seal bags, include a protein and
carbohydrate supplement, a complete instant breakfast supplement, a full
assortment of low sodium, sugar free items as well as no-bake egg custard,
whipped topping and texture enhancement products.
WATER PRODUCTS. The Company intends to market both sterile water and normal
saline solutions for medical irrigation applications to the same customer
base as its nutritional line of products. The Company hopes to leverage the
strength of its marketing contacts to provide incremental sales volume.
FUTURE PRODUCT DEVELOPMENT. Management anticipates adding new flavors and
textures to its nutritionals product line. In addition, the Company
anticipates developing additional formulations utilizing its proprietary
emulsion technologies to address specific medical situations. There can be
no assurances that the Company will be successful in developing new
products or, if they are successful in developing new products, that they
will meet with acceptance in the marketplace.
PATIENT BENEFITS
The Company's products provide specific patient benefits, specifically:
SCIENTIFICALLY-FORMULATED. The Company's formulations have been tested
under controlled conditions for their particular applications. Product
quality is closely monitored in the Company's laboratory to assure
consistently reliable product performance which generates predictable
favorable results when prescribed.
ASEPTICALLY-PROCESSED. All of the Company's liquid nutritional products
will be aseptically processed and packaged, providing extended shelf
life without the need for refrigeration.
CONCENTRATED NUTRITION. The Company's special formulations and more
efficient nutrient composition make it possible to serve patients
smaller, more compact portions that don't leave them feeling full or
bloated. As a result, these supplements compliment a solid food diet
rather than interfere with it.
READY-TO-DRINK. The Company's liquid products will be packaged in
ready-to-consume "PEEL AND DRINK(TM)" four-ounce plastic cups which
need no refrigeration. They can then be stored next to patient care
stations to be used whenever a patient is hungry or thirsty.
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HEALTHCARE FACILITY BENEFITS
The Company's products were designed to be efficient for the healthcare
facilities to administer. Specific benefits include:
CLINICALLY-PROVEN. The Company has conducted several empirical studies
working in conjunction with nursing homes. The study results
demonstrated that patients using the Company's products receive more
nutrition and gained more weight than with competitive products.
Increases in serving intake over competitive products ranged from 50%
to 95%. The Company attributes this increase to two factors. First, the
volume of the serving is more closely aligned to the patient's ability
to consume a supplement. Second, the Company's products simply taste
better. On average, during the studies, the patients using the
Company's products gained 4.3 pounds per month versus a 1 pound per
month weight gain for those consuming competitive products. These
results are significant since weight gain is considered a key factor in
determining the success of patient nutrition programs.
INCREASED NUTRITIONAL DENSITY. The Company designed its products to
provide increased nutritional density since the patients studied in
their clinical tests could not consume a sufficient volume of food to
both support ongoing metabolism and maintain health. The Company's
four- ounce liquid products contain essentially the same nutritional
density in proteins, minerals and vitamins as eight ounces of the
competitive brands.
REDUCED WASTE. The Company's liquid products will be packaged in
convenient ready-to-drink four-ounce servings. The Company's studies
show that, in most cases, patients consistently consume up to four
ounces of a liquid food supplement per serving. Competitive products
are generally packaged in eight ounce portions with at least half of
the product going to waste on average.
COST EFFECTIVE. In addition to the product waste issues, discussed
earlier, the Company's products will normally be consumed directly from
the four ounce disposable cup, eliminating the need for washing,
rinsing, drying and storing additional serving containers.
Additionally, the Company's light-weight plastic containers and reduced
serving size will result in lower freight costs which can be passed
along to the customer.
NO REFRIGERATION REQUIRED. Government regulations, requiring that
scratch preparation milk- based products 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 during transport, storage or prior to serving.
MARKETING STRATEGY
Unlike the Company's major competitors, (Ross Laboratories, Inc. and Mead
Johnson Nutritionals, who together control an estimated 93% of the market), the
Company will focus its primary efforts on the nursing home segment of the
medical nutritionals market. Management believes that by concentrating its
efforts on addressing the needs of the nursing home market, developing
appropriate product formulations, packaging formats and marketing strategies, it
will be successful in penetrating and gaining a significant share of this market
which has been under-serviced by competition.
The Company also intends to expand its business through new product
introductions utilizing its proprietary production and aseptic filling
technologies as well as through expansion into international markets. There can
be no assurances that the Company will be successful in either of these areas.
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The nursing home market is presently undergoing consolidation with large nursing
home chains acquiring one another in an attempt to obtain efficiencies of scale.
The Company's management has a significant number of long-standing business
relationships with the senior management of these major accounts. The Company
believes that this presents significant opportunities for it since obtaining
only one or two major accounts or portions of their total business will provide
enough sales volume to achieve break-even levels. There can be no assurances
that the Company will be successful in obtaining sufficient volumes from these
major accounts, or if they are achieved, that the profit margins resulting from
these sales will be sufficient to provide break-even operations. The Company's
future sales may be dependent on a few major accounts.
COMPETITION
The Pharmaceutical nutritional product industry's annual revenue is estimated by
the Company to approximate $4 billion in the United States alone. Three
companies currently dominate the 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 these companies are much larger and better financed than the Company,
have established products and an established customer base, and can, therefore,
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 repositioning
their product lines in more concentrated serving sizes. Therefore, the Company
may not be a significant factor in these markets for the near or foreseeable
future.
MANUFACTURING
Manufacturing of dry mix products entails the purchasing of raw materials such
as sugar and milk, measuring the ingredients based on formulations, mixing and
finally, packaging. The Company will check its products for quality and moisture
content at its own in-plant laboratory facility. The dry mix packaging process
involves using rolls of pre-printed foil which are run through a special form,
fill and seal machine that makes the envelope, fills it with product and seals
it for shipment.
The liquid packaging process is more complex which has required the construction
of a liquid processing facility. The Company has acquired and installed the
major components required for the production of its products in its plant in Las
Vegas, Nevada (see Item 2 - "Description of Property).
PRODUCT PROTECTION
The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, WINLAC(TM). The Company has also
trademarked its company name, its liquid nutritional product names as well as
"PEEL AND DRINK(TM)" and "THE NUTRITIONAL DIFFERENCE(TM)". There can be no
assurances 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. Currently, the Company requires each of its
employees to sign confidentiality agreements as a condition of employment to
protect its formulations and production know-how. However, there can be no
assurances that the Company will be successful in these efforts.
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REGULATORY COMPLIANCE AND APPROVAL REQUIRED FOR OPERATION
The Company's operations are regulated principally by 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 at an acceptable
cost, if they were to occur.
Regulatory approval is required for the manufacturing process, which principally
entails certification of the processor and the aseptic filler/packaging machine.
The manufacturers have warranted that their equipment meets F.D.A. requirements
for aseptic machinery. The manufacturer of the processor has had 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
of its kind made by it for a U.S. manufacturer. There can be no assurance that
either of these pieces of equipment will be approved by the F.D.A. Failure to
meet regulatory approval will preclude the Company's ability to manufacture and
ship its products.
SOURCES OF SUPPLY
There are alternative sources of supply for the raw materials required for the
manufacture of the Company's products. The Company considers the sources and
names of its principal suppliers to be confidential.
EMPLOYEES
Currently, the Company has 19 full-time employees. There are presently no labor
contracts in effect with the Company.
ORGANIZATION
Crown Laboratories, Inc., ("the Company"), was incorporated on February 23,
1989, in Delaware, as Industrialistics, Inc. In November 1991, Industrialistics,
Inc. changed its name to Crown Laboratories, Inc.
Item 2. DESCRIPTION OF PROPERTY
The Company presently occupies 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
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. The Company has obtained an
option to purchase its current manufacturing facility for $2,700,000 and intends
to exercise its option. The Company has secured a commitment for a first
mortgage loan of $1,860,000 on the building from General American Insurance
Company. The mortgage, which will carry a fixed effective annual interest rate
of 8.65%, will provide 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 fixed 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 is presently leasing
20,000 square feet of space in its Las Vegas facility under a one year lease
signed in October of 1995 with two, one month renewal option. The Company
collected $25,200 in lease revenue during 1995 and $25,800 during 1994 which
amounts are reflected in the financial statements of the Company.
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The Company is contemplating establishing a dry-mix operation in Puerto Rico.
Raw materials and labor are less expensive in Puerto Rico than in Las Vegas,
Nevada, resulting in a lower cost of manufacturing. The Company also possesses
an option to lease a building in the Fjardo region of Puerto Rico. This option,
which has been successfully renewed several times, is currently scheduled to
expire in July of 1996. The Company would also 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 a subsidiary in Puerto Rico, which has not
yet been capitalized. Through December 31, 1995, the Company has incurred and
expensed approximately $110,000 relating to these efforts.
Item 3. LEGAL PROCEEDINGS
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. One of these vendors, Lloyds Refrigeration Inc.
("Lloyds") has filed suit against the Company, and the Company has filed its
counterclaims (see discussion below). 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 supercedeas
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 District Court's decision. This appeal has been
accepted by the Nevada Supreme Court. Although the Company feels that
its liability, if any, will be limited to attorney's fees, it has
expensed the amount of the preliminary judgment.
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.
CROWN V. LLOYDS which was filed by the Company in July, 1995 in
response to Lloyds' attempt to foreclose on its mechanics' lien. The
dispute and the lien arose as a result of Lloyds' work on the
construction of the Company's manufacturing facilities in Las Vegas.
The Company has had to correct the construction deficiencies made by
Lloyds and seeks to offset its incurred costs against the
approximately $123,000 claimed by Lloyds. The Company anticipates that
it will prevail on the merits of its case.
Standard Chartered Bank, ("Standard"), had provided financing to the
manufacturer of the filler machine and Standard has claimed that it has a $1
million security interest in the filler machine. Based upon the representations
made, the Company entered into a letter of intent to finance $1 million 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 $1
million amount which Standard is allegedly owed. The Company cannot predict the
ultimate outcome of this claim.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's stock was listed on the American Stock Exchange, Emerging Company
Marketplace (AMEX ECM) on March 29, 1994. It trades under the symbol CLL.ec.
Prior to that time, the Company's stock was listed on the Electronic Bulletin
Board (EBB) of the NASD. The table below lists the low and high bid prices for
the stock for each quarter over the last two years.
<TABLE>
<CAPTION>
CALENDAR 1995 CALENDAR 1994
------------- -------------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1ST QUARTER (EBB through 3/31/94) $2.25 $3.13 $5.00 $5.50
2ND QUARTER (AMEX ECM) $2.38 $2.81 $1.50 $4.63
3RD QUARTER (AMEX ECM) $1.88 $2.94 $1.50 $2.19
4TH QUARTER (AMEX ECM) $1.25 $1.94 $1.88 $3.06
</TABLE>
The source of the information, (summarized above), 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,
mark-down or commissions, and may not reflect actual transactions.
The American Stock Exchange recently announced that it will no longer accept new
issuers for the Emerging Company Marketplace, but will continue trading existing
shares, including the Company's'. 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 continue. On December 19, 1995, a separate registration statement
was declared effective by the Securities and Exchange Commission which
provides for the resale by selling shareholders named therein of up to
7,247,303 shares of Common Stock. On February 13, 1996, an additional
registration statement which provides for the resale by selling shareholders
named therein of up to 2,665,625 shares of Common Stock was declared effective
by the Securities and Exchange Commission. Sales of a substantial number of
shares of Common Stock under either registration statement could have a
material adverse effect on the price of the Common Stock. 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.
There are approximately 1,600 beneficial 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.
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Item 6: MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company has been in the pre-marketing phase of operation and had no sales
for the years ended December 31, 1995 and 1994 except for approximately $80,100
of dry-mix products sold in the fourth quarter of 1995. For the years ended
December 31, 1995 and 1994, the Company incurred losses of $3,839,092 and
$1,569,980, respectively. 1995's higher losses are attributable to increased
salaries associated with additional employees and higher operating and
start-up expenses as the Company nears production and sale of its liquid
nutritional products. The accumulated consolidated deficit at December 31,
1995 was $7,828,203. 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 Company, working with
an independent laboratory, (the Process Authority), to review its manufacturing
equipment, manufacturing procedures, manuals and monitor bacteriological kill
tests.
There is a panel of six different bacteriological kill tests that must be
passed to file with the F.D.A. They measure 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 throughout
actual manufacturing, assuring that complete compliance with aseptic
manufacturing guidelines is maintained.
After the test samples are prepared, they are incubated
for a 21 day period and, if the test results are favorable, the Process
Authority summarizes the results of the tests and combines it with their
systems audit (review of machinery, manuals and operating safeguards) 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. The Process Authority has
confirmed that the Company has passed four of the panel of six sterility tests
with the results of the remaining tests due by April 18, 1996. On April 12,
1996, the Process Authority and the Company provided the F.D.A. with a
preliminary submission of documentation pertinent to the filing of Company's
system including a description of the low-acid aseptic processing system, the
aseptic filler manual and a piping diagram for the entire production and
packaging system on April 12, 1996. Provided that the results of the ongoing
bacteriological tests are favorable, the Process Authority is targeting its
efforts towards completing the filing form and supporting documentation by
April 19, 1996.
Except for the historical information contained herein, the matters discussed
are forward looking statements that involve risks and uncertainties, including
whether the Process Authority will be able to confirm Crown's findings of
sterility or the time needed to complete any of such testing and when the
filings are completed with the F.D.A., the reaction of the F.D.A. or when the
F.D.A. will react.
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, 1995. 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, (see
Item 3, "Legal Proceedings"). 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 and the equipment manufacturer believe 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 timeframe. 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.
11
<PAGE> 12
The Company has identified a line of water solution products which will
complement its line of liquid nutritionals, selling to the same customer base
and delivered through the same distribution channels. While the Company believes
that it can compete effectively in the market for these products, there can be
no assurances that the Company will receive approval for these products from the
F.D.A. or that the products will meet with acceptance in the market.
PLAN OF OPERATIONS
In June 1995, the Company 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 $80,100 of
dry mix products in one Eastern European country through a subsidiary and has
collected approximately $59,000 to date. The Company will not commence any sales
of its liquid nutritional and water products until its manufacturing facility
has been approved by the F.D.A., as applicable.
FUNDING
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 1 year at the same exercise
prices. This offer was extended on March 12, 1996 until March 28, 1996. A total
of 613,688 warrants representing $843,821 were exercised.
During 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement and this amount is reflected in the
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 years from the date of issuance.
During 1995, the Company also raised $3.5 million through the issuance of
Series C Preferred Stock and $500,000 thereafter. The Series C Preferred Stock
pays no dividends, but imputes a 6% effective annual rate of return 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.
During 1995, the Company's Board of Directors authorized utilizing an
alternative price to the 5 day average market price provided for in the
conversion of Series C Preferred Stock for two large conversions. As of
December 31, 1995, approximately 40% of the Series C Preferred Stock issued
had been converted into 1,253,447 shares. To the extent that the Company
FINANCIAL CONDITION
Working capital at December 31, 1995 was a deficit of ($828,920) with
approximately $700,000 in accounts payable attributable to capital expenditures
and leasehold improvements. Since December 31, 1995, the Company has raised an
additional $500,000. Cash and cash equivalents balances were $677,431 as of
December 31, 1995. The Company believes that it has adequate funds to support
its operations through the second quarter of 1996. 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 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.
As a result of delays in installing the equipment and problems encountered with
bacteriological tests which delayed filing with the F.D.A., 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 exploring possible
alternatives for raising additional debt and equity 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 favorable to the Company.
Based upon the factors discussed in the preceding paragraph and given that the
Company has suffered and continues to suffer recurring operating losses and at
December 31, 1995 had a working capital deficit of ($828,290) and an accumulated
deficit of ($7,828,203), the Company's independent public accountants have
modified their report on the Company's financial statements to indicate that
factors exist which create substantial doubt about the ability of the Company to
continue as a going concern and which raise uncertainty as to the recoverability
and classification of recorded asset amounts and the amounts and classification
of liabilities. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
12
<PAGE> 13
uses equity securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing shareholders.
Item 7. FINANCIAL STATEMENTS
See the audited financial statements for the years ended December 31, 1995 and
1994.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes or disagreements with the Accountants for the periods
ending December 31, 1995 and 1994.
13
<PAGE> 14
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 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Craig E. Nash 41 Chairman of the Board of
Directors and Chief Executive Officer
Scott O. Nash 41 President and
Vice Chairman of the Board of Directors
Christopher Demetree 32 National Account Executive and Director
Vincent Casella 57 Director
Lee Allen Hooker 50 Director, Chairman of the Compensation
Committee
Arthur M. Berkowitz 55 Director, Chairman of the Audit Committee
Member of the Compensation Committee
Linda Carrick, Ph.D. 42 Director, Member of the Audit Committee
Scott E. Hilley 44 Vice President, Finance
</TABLE>
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 fifteen years experience in
pharmaceutical and food-products marketing. Mr. Nash attended the University of
Southern California.
SCOTT O. NASH has been President and Vice Chairman of the Board of Directors of
the Company 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.
CHRISTOPHER 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
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.
VINCENT J. CASELLA became a director of the Company in July 1995. Mr. Casella is
an equity specialist, floor broker, and Chairman of the Philadelphia Stock
Exchange. He has accumulated over 35 years of experience in numerous senior
positions in the securities industry, including associations with Republic
Securities Corporation, Steadman Funds, and several NYSE firms. He was Trustee
of PHLX Foundation, Director of Stock Clearing Corporation, and Director of
Philadelphia Depository Trust Company. He and has held chairman and
vice-chairman positions in a variety of steering committees at the Exchange.
14
<PAGE> 15
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 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 18 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, PH.D. became a director of the Company in June 1994. Dr. 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 also completed a
Wharton Nurse Executive Fellowship. Dr. Carrick holds a B.S. degree in nursing
from Villanova University, and an M.S. degree in Surgical, Cardiovascular
Nursing and a Ph.D. in Healthcare Administration from The University of
Pennsylvania.
SCOTT E. HILLEY has been Vice President of Finance of the Company since June
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. in Finance from New York University.
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, subject to any
employment agreements.
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 review of the copies of such forms furnished to the Company,
and written representations from the Company's directors and executive officers,
the Company believes that Mr. Vincent Casella filed his December 1995 Form 4
Statement after the required filing date.
15
<PAGE> 16
Item 10. EXECUTIVE COMPENSATION
No executive officer of the Company earned remuneration in excess of $100,000
during 1995. The following table shows all remuneration earned by the Chief
Executive Officer during the fiscal years ended December 31, 1993, 1994, and
1995 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 (2) Award Options
- ------------------ ------- ---------------- ----- -------
<S> <C> <C> <C> <C> <C>
Craig Nash 1995 $78,771 0 $0 0
Chief Exec. Officer 1994 $51,329 0 0 0
1993 $24,904(1) 0 0 768,028
</TABLE>
(1) Includes 1,665,545 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 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. Of the amount above,
all shares are vested except for 20,000 shares which will vest 10,000 on
January 3, 1996 and 10,000 on January 3, 1997. All the shares are eligible
to receive dividends.
(2) The Company provided automobile allowances to certain of its employees,
including certain persons who are executive officers of the Company,
(including Mr. Nash), 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 lessor 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.
In 1993, the Company entered into a five year employment agreement with Craig
Nash. He is currently receiving a base salary of $70,000 per annum, although
such amount may be increased at the discretion of the Board of Directors. The
Company can terminate such employment for cause on 90 days notice. If the
individual is 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 his employment
agreement.
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.
16
<PAGE> 17
The following table gives certain information regarding options held on December
31, 1995.
<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 - $364,813 -
</TABLE>
No options were granted to or exercised by Craig Nash during 1995.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of December 31, 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:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ------------------- ----------------------- --------
<S> <C> <C>
MR. CRAIG E. NASH 2,405,014 Direct 16.0%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
MR. SCOTT O. NASH 2,656,276 Direct 17.6%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
INVESCO NORTH AMERICAN HOLDINGS 1,486,250 Direct 10.4%
7800 E. Union Avenue
Denver, CO 80237
THE GIFFORD FUND, LTD See Footnote (1) N/A
Charlotte House
Charlotte Street
P.O. Box N9204
Nassau, Bahamas
</TABLE>
(1) The Gifford Fund presently holds $2,121,233 of Series C Preferred Stock of
Crown Laboratories, Inc. The Series C Preferred Stock provides for
conversion into Crown Laboratories, Inc. Common Stock based upon market
prices. If converted, the Gifford Fund, Ltd. may become a holder of more
than 5% of the common shares outstanding of Crown Laboratories, Inc.
depending upon the market price of the shares at time of conversion.
17
<PAGE> 18
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of December 31, 1995 with
respect to the beneficial ownership of the Company's Common Stock by each
executive officer, director, and by all executive officers and directors as a
group:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS(1)
- ------------------- ----------------------- -----------
<S> <C> <C>
MR. CRAIG E. NASH 2,405,014 Direct 14.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
MR. SCOTT O. NASH 2,656,276 Direct 16.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
CHRIS DEMETREE 694,075 Direct 4.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
VINCENT J. CASELLA 477,850 Direct 2.9%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
LEE ALLEN HOOKER 76,478 Direct 0.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
ARTHUR M. BERKOWITZ 150,029 Direct 0.9%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
DR. LINDA CARRICK, PH.D. 76,500 Direct 0.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
SCOTT E. HILLEY 22,500 Direct 0.1%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
All Executive Officers and
Directors as a Group 6,558,722 40.1%
</TABLE>
(1) Percentages are calculated based on outstanding shares and options and
warrants exercisable within 60 days.
18
<PAGE> 19
DIRECTORS' REMUNERATION
All outside members of the Board of Directors, Vincent Casella, Lee Allen
Hooker, Arthur M. Berkowitz, and Dr. Linda Carrick, Ph.D., each received options
to purchase 50,000 shares of common stock at exercise prices ranging from $1.275
to $2.50 per share. Of the options received, options to purchase 25,000 shares
of common shock 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. Additionally, Lee Allen Hooker, Arthur M.
Berkowitz, Dr. Linda Carrick, and Myles Cane, a former director, received
options to purchase 10,000 shares of common stock at an exercise price of $2.44
per share.
Additionally, Arthur Berkowitz received $1,500 per month, (beginning on July
27, 1995), for serving as Chairman of the Audit Committee of the Company's
Board of Directors.
Vincent Casella and his associates were granted a total of 230,000 options to
purchase the Company's common stock for their roles in assisting the Company in
strategic planning issues. Mr. Casella was granted 100,000 options at an
exercise price of $1.44 per share which expire five years from the date of
grant, (November 13, 1995).
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CRAIG AND SCOTT NASH
Craig and Scott Nash 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> 20
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
3(c) Certificate of Incorporation, as amended (6)
3(b) Bylaws, as amended (4)
4(a) Form of Warrant Agreement, including Form of Warrant, for private
placement investors (4)
4(c) Specimen of Common Stock Certificate of Registrant (2)
10(a) 1992 Stock Option Plan (5)*
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(h) Lease for Las Vegas, Nevada (2)
10(j) Agreement with NME (2)
10(k) Agreements with COHr/Purchase Connection (2)
10(q) Employment Agreement with Scott Hilley, as amended (1)*
22 Subsidiaries (Both 100% owned): Crown Russia OOO
Crown Puerto Rico
24 Consent of Arthur Andersen LLP
(b) Form 8(K): None
* 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.
(4) Previously filed as an exhibit to the Form 10-KSB for the fiscal year ended
December 31, 1994.
(5) Previously filed as an exhibit to the Form 18-K of the Registrant filed
September 24, 1991.
(6) Previously filed as an exhibit to the Form 10QSB for the quarter ended
September 30, 1995
20
<PAGE> 21
CROWN LABORATORIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 677,431 $ 1,826,935
Accounts Receivable 60,121 1,588
Inventory
Raw and Packaging Materials 97,647 -
Finished Goods 11,347 -
Prepaid expenses and employee and
officer advances 44,509 68,311
----------- -----------
Total current assets 891,055 1,896,834
PROPERTY AND EQUIPMENT
Leasehold improvements 1,291,497 886,424
Machinery and Equipment 7,595,945 2,418,946
----------- -----------
8,889,442 3,305,370
Accumulated Depreciation and Amortization (208,679) (36,284)
----------- -----------
Net Property and Equipment 8,678,763 3,269,086
MACHINERY RIGHTS AND BLUEPRINTS 184,478 -
DEPOSITS AND DEFERRED ASSETS 232,006 899,124
----------- -----------
TOTAL ASSETS $ 9,986,302 $ 6,065,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and
capital lease liabilities $ 267,713 $ 298,320
Accounts payable and accrued expenses 1,451,632 243,830
----------- -----------
Total current liabilities 1,719,344 542,150
ACCRUED SALES TAX PAYABLE 387,124 -
LONG-TERM DEBT AND CAPITAL LEASE LIABILITIES 1,408,912 813,431
SHAREHOLDERS' EQUITY
Preferred stock--$0.001 par value;
5,000,000 shares authorized;
212 shares outstanding 2,121,233 -
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 14,290 11,841
Additional paid-in-capital 12,163,601 8,653,500
Accumulated deficit (7,828,203) (3,956,878)
----------- -----------
Total shareholders' equity 6,470,921 4,709,463
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,986,302 $ 6,065,044
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements.
F-1
<PAGE> 22
CROWN LABORATORIES, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------------
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
NET SALES $ 80,100 $ -
Cost of Sales (28,639) -
GROSS PROFIT 51,461 -
General and Administrative Expenses 3,709,518 1,600,943
----------- -----------
LOSS FROM OPERATIONS (3,658,057) (1,600,943)
Other Income/(Expense)
Other Income 25,200 25,800
Interest expense (238,011) (41,039)
Interest income 46,776 46,202
----------- -----------
LOSS BEFORE INCOME TAXES (3,824,092) (1,569,980)
Income Tax Provision (15,000) -
----------- -----------
NET LOSS $(3,839,092) $(1,569,980)
=========== ===========
NET LOSS PER SHARE $(0.30) $(0.15)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING $12,884,527 $10,492,664
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements
are an Integral Part of these Financial Statements.
F-2
<PAGE> 23
CROWN LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS EQUITY
For the Year ended December 31, 1995
<TABLE>
<CAPTION>
Shares of Common Additional Accumulated Preferred
Common Stock Stock Paid-In Capital Deficit Stock Total
------------ -------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1994 11,840,941 $11,841 $ 8,653,500 $(3,955,878) $ 0 $ 4,709,463
Shares issued under Private Placement 1,196,125 1,196 2,391,054 - 3,500,000 5,892,250
Fund raising costs - - (437,990) - - (437,990)
Proceeds from option conversions - - 7,500 - - 7,500
Compensation expense for options
granted to employees - - 138,790 - - 138,790
Shares issued on the conversion
of Series C Preferred Stock 1,253,447 1,253 1,410,747 - (1,412,000) 0
Imputed interest for
Series C Preferred Stock (33,233) 33,233 0
Net loss for the period ended
December 31, 1995 - - - (3,839,092) - (3,839,092)
---------- ------- ----------- ----------- ---------- -----------
BALANCE AS OF DECEMBER 31, 1995 14,290,513 $14,290 $12,163,601 $(7,828,203) $2,121,233 $ 6,470,921
========== ======= =========== =========== ========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
F-3
<PAGE> 24
CROWN LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Additional
Shares of Common Paid-In Accumulated
Common Stock Stock 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
Common shares issued
to key employees for
employment agreements 6,000 6 (6) - -
Common shares issued
to consultants 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
Net loss 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.
F-4
<PAGE> 25
CROWN LABORATORIES, INC.
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------------
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(3,839,092) $(1,569,980)
ADD/(DEDUCT) ITEMS NOT IMPACTING CASH:
Depreciation and amortization 172,395 7,740
Issuance of shares to employees and consultants 138,790 -
FUNDS USED IN OPERATIONS:
(Increase)/Decrease in receivables (60,121) -
(Increase)/Decrease in inventories (107,406) 7,459
(Increase)/Decrease in prepaid expenses
and employee advances 23,802 (37,761)
Increase/(Decrease) in accounts payable
and accrued expenses 1,207,803 36,353
----------- -----------
Total cash generated from/(used for)
operations $(2,463,830) $(1,556,189)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures and leasehold improvements (5,582,072) (2,359,866)
(Increase)/Decrease in deposits and deferred assets 667,118 92,426
Increase/(Decrease) in accrued sales tax payable 387,124 -
Purchase of machinery rights & blueprints (184,478) -
----------- -----------
Total cash (used in)/generated from
investing activities (4,712,308) (2,267,440)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans 767,853 286,650
Repayment of loans payable (202,979) (180,751)
Proceeds from issuance of common and preferred
stock and the exercise of options 5,899,750 3,243,015
Fundraising costs (437,990) (552,682)
Repurchase of common shares - (29,600)
Prior period adjustments - 56,520
----------- -----------
Total cash provided by /(used in) financing
activities 6,026,634 2,823,152
----------- -----------
Net increase/(decrease) in cash and
cash equivalents (1,149,504) (1,000,477)
CASH AND CASH EQUIVALENTS, beginning of period 1,826,935 2,827,412
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 677,431 $ 1,826,935
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements.
F-5
<PAGE> 26
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. BACKGROUND AND ORGANIZATION
Crown Laboratories, Inc., ("the Company"), was incorporated on February 23,
1989, in Delaware, as Industrialistics, Inc. In November 1991,
Industrialistics, Inc. changed its name to Crown Laboratories, Inc.
Since its inception, the Company has been principally engaged in the research
and development of proprietary medical nutritional dry-mix and liquid
supplement products to be sold primarily to nursing homes and hospitals.
During 1995, the Company has raised $3.5 million through the issuance of Series
C Preferred Stock and has raised $500,000 thereafter. The Series C Preferred
Stock pays no dividends, imputes a 6% effective annual rate of return upon
conversion into common stock. This return to holders is being accounted for as a
direct reduction of accumulated deficit 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 December 31, 1995, approximately 40% of the Series C Preferred
Stock issued had been converted into 1,253,447 shares.
During 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement which 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
investment. Fractional units have also 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.
During 1995, the Company incurred $438,000 of costs relating to issuances of
stock. These costs have been accounted for as a reduction of Additional Paid-in
Capital.
The Company concluded a 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 $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. 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.
Please refer to note 6 for a summary of options and warrants outstanding.
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 "FDA"). The commissioning process began on April 13, 1995
and delays have been experienced primarily as a result of the aseptic filler's
inability to meet F.D.A. certification criteria when it was shipped to the
Company. There is a panel of sterility tests that must be passed in order to
file with the F.D.A. on April 12, 1996. The Company, based upon the report of
the National Foods Laboratories which has confirmed that the Company has passed
four of the panel of six sterility tests, filed a preliminary submission with
the F.D.A. Management believes that the remaining tests will be passed shortly,
with the final submission being filed immediately thereafter. 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.
As a result of delays in installing the equipment and problems encountered with
bacteriological tests which delayed filing with the F.D.A., 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 exploring possible
alternatives for raising additional debt and equity 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 favorable to the Company.
Based upon the factors discussed in the preceding paragraph and given that the
Company has suffered and continues to suffer recurring operating losses and at
December 31, 1995 had a working capital deficit of $828,289 and an accumulated
deficit of $7,828,203, the Company's independent public accountants have
modified their report on the Company's financial statements to indicate that
factors exist which create substantial doubt about the ability of the Company to
continue as a going concern and which raise uncertainty as to the recoverability
and classification of recorded asset amounts and the amounts and classification
of liabilities. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
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 will require
further financial resources. The Company will not have sales of liquid
nutritional products until the Las Vegas manufacturing facility is certified by
the FDA. 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.
PRODUCT PROTECTION
The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, WINLAC(TM). The Company has also
trademarked its company name, its liquid nutritional product names as well as
"PEEL AND DRINK(TM)" and "THE NUTRITIONAL DIFFERENCE(TM)". There can be no
assurances 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. Currently, the Company requires each of its
employees to sign confidentiality agreements as a condition of employment to
protect its formulations and production know-how. However, there can be no
assurances that the Company will be successful in these efforts.
F-6
<PAGE> 27
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Crown
Laboratories, Inc. and its wholly-owned subsidiaries, (the "Company") which
includes Crown Russia OOO and Crown Puerto Rico. All intercompany balances have
been eliminated in consolidation.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company records sales upon shipment of product to its customers which is
concurrent with the transfer of title. In the fourth quarter of 1995, the
Company sold product through its subsidiary to Eastern European customers.
Differences in commercial practices and language have presented some challenges,
but the Company has collected a portion of the receivables and management is
confident that it will ultimately collect the balance of the receivables
outstanding. Accordingly, the Company has not established any allowance for
receivables which may ultimately be uncollectible.
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.
INVENTORY
Inventory is stated at the lower of cost or market using the first-in first-out
method of accounting. At December 31, 1995 and 1994, inventory consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw Materials $ 97,647 $1,588
Work in Progress 0 0
Finished Goods 11,347 0
-------- ------
Total Inventory $108,994 $1,588
-------- ------
</TABLE>
PROPERTY AND EQUIPMENT/MACHINERY RIGHTS AND BLUEPRINTS
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 range from 5 to 15 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 external costs for installation and has
not capitalized any management, executive or overhead costs. Such costs are
charged to expense as they are incurred.
During 1995, the Company obtained the rights and blueprints to its aseptic
filler machine from the German bankruptcy court. Costs incurred to obtain
machinery rights and blueprints are capitalized and will be amortized over the
same life as the underlying equipment.
INCOME TAXES
The Company has operated at a loss since inception and has a net operating loss
carry-forward of approximately $7.8 million as of December 31, 1995. The Company
is researching the availability of such net operating losses to the Company. The
availability of all loss carry-forwards to offset U.S. taxable income 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 carry-forwards and has not established a deferred tax
asset. The Company's non-U.S. subsidiaries are subject to taxation in those
countries in which they conduct business. Situations may arise where the Company
pays cash taxes on profits earned in foreign countries but such taxes paid
cannot be used to offset U.S. taxable income until such period as the Company's
U.S. operations have generated taxable income and utilized available net
operating loss carry-forwards. For the year ended December 31, 1995, the Company
recorded an income tax provision of $15,000 for its estimate of income-based
taxes which may be payable to Russian tax authorities on profits earned in
Russia. Given the complexities of Russian tax legislation and in the
application of those regulations by authorities, actual taxes which may be owed
could be different, but such difference is not expected to be material.
To date, the Company has only conducted operations in the State of Nevada which
does not impose a tax on income.
F-7
<PAGE> 28
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
The following information supplements the statement of cash flows for the years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest Paid $270,651 $ 41,039
Income Taxes -0- -0-
Assets acquired through capital lease financing $ 31,838 $895,852
</TABLE>
3. LONG-TERM DEBT AND CAPITAL LEASE LIABILITIES
<TABLE>
<CAPTION>
Collateral 12-31-95 12-31-94
---------- -------- --------
<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 January 2003 (Prime + 2%) Unsecured $ 451,811 $ 503,982
FIRST SECURITY BANK OF NEVADA
Guaranteed by Messrs. Craig and Scott Nash
(Guaranteed by the U.S. Small Business
Administration)
Monthly Payments of $10,440 for 120 months All Assets of
ending February 2005 (Prime + 2 3/4%) The Company 714,286 N/A
GENERAL ELECTRIC CAPITAL CORPORATION -
Guaranteed by Messrs. Craig and Scott Nash
Monthly payments of $11,100 for 60 months
ending July 1999. Original balance $541,605
(10.65% Interest) Stock Processor 402,825 476,163
MCBA, INC. -
Monthly lease payments of $3,401 for 36 months
ending June 1997. Original balance $109,000 Computer
(15% Interest) Software 57,197 84,639
MEMOREX-TELEX -
Monthly lease payments of $1,396 for 36 months
ending June 1997. Original balance $35,727 Computer
(24% Interest) Equipment 23,808 31,429
SPRINT/NORTH LEASING
Monthly lease payments of $533 for 36 months
ending August 1997. Telephone
(12.85% Interest) System 9,718 15,538
ASSOCIATES LEASING -
Monthly lease payments of $567 for 36 months
ending in September 1998 Fork Lift Truck 16,980 N/A
(10.50% Interest) /Pallet Lift ---------- ----------
Total Long Term Debt and Capital Lease Liabilities 1,676,625 1,111,751
Less: current portion 267,713 298,320
---------- ----------
Long-term debt net of current portion: $1,409,385 $ 813,431
========== ==========
</TABLE>
The amounts due under the lease obligations are net of interest expense.
F-8
<PAGE> 29
Capital lease liabilities and long-term debt as of December 31, 1995 are payable
as follows:
<TABLE>
<S> <C>
1996 $ 469,546
1997 398,378
1998 364,696
1999 304,092
2000 226,392
Thereafter 713,880
----------
Gross Amount $2,476,984
Less: amount
representing capitalized
lease interest 800,359
----------
Principal Amount $1,676,625
</TABLE>
4. MANAGEMENT EMPLOYMENT AND CONSULTING CONTRACTS
The Company has an obligation to make minimum cash payments for management
employment contracts of $559,000 for 1996, $636,000 for 1997, $175,250 for 1998,
and $155,000 for 1999 and $102,500 for 2000.
During 1995, 411,000 options were issued to consultants and a director (Vincent
Casella) received 100,000 options to purchase the Company's common stock at a
price of $1.44 per share. As compensation for assisting the Company in its
strategic planning efforts. These options expire 5 years from the date of
grant, (November 13, 1996) for services rendered. All options were granted at
exercise prices that were equal to or greater than 85% of the market price of
the Company's shares at the time of grant.
Additionally, the Company issued stock to two employees (total of 40,000
shares) which vest 40%, two years after the date of their employment and 60%,
five years after their date of employment. Additionally, the Company issued
an additional 141,000 options to employees at an exercise price which was
based upon an 85% discount to the market price at the time of grant. Vesting
of these options will occur 40%, two years after the date of their employment
and 60%, five years after their date of employment. The Company also issued
100,000 options at $.25 and 125,000 at $1.01 to the Vice President, Finance
under terms of his employment agreement. These options vest 10% on the
signing of his contract, (June 7, 1995), 40% after two years and 50% after
five years. Salary expense for these options is being accrued over the life
the vesting schedules. During 1995, the Company recognized compensation
expense of $138,790 and recorded a corresponding increase to additional
paid in capital.
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 2003.
Options are not transferable under the Plan and terminate within specified
periods of time after termination of an optionee's employment.
F-9
<PAGE> 30
On November 18, 1993, options to purchase 2,100,000 shares of the Company's
common stock were granted to the Company's employees. The schedule below
outlines the amount of options outstanding as of December 31, 1995. These
options have an exercise price of $1.275 and are fully vested. All 1,874,967
options expire in 2003.
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS
<S> <C>
Craig Nash 768,028
Scott Nash 768,029
Other Employees 338,910
-------
Total Employee Stock Option Plan Options 1,874,967
</TABLE>
6. OTHER STOCK OPTIONS AND WARRANTS
As of December 31, 1995, the Company had granted the following options to
purchase 2,310,700 shares of its common stock, (in addition to those in the
Employee Stock Option Plan, summarized above), at the following exercise prices:
<TABLE>
<CAPTION>
# SHARES SUBJECT TO DATES OF
FORFEITURE VESTING
---------- -------
<S> <C> <C> <C>
241,000 shares at $0.25 per share through November 2005 231,000 1/96-11/00
125,000 shares at $1.01 per share through June 2005 112,500 6/95-6/00
360,000 shares at $1.275 per share through June 1997 100,000 2/96-6/96
200,000 shares at $1.44 per share through November 1998 -0- Vested
15,834 shares at $1.50 per share through January 2001 -0- Vested
246,503 shares at $1.65 per share through August 1998 -0- Vested
125,000 shares at $1.70 per share through September 2004 114,584 9/95-9/99
75,000 shares at $1.75 per share through October 1998 -0- Vested
200,000 shares at $1.75 per share through September 1999 200,000 see below
200,000 shares at $2.00 per share through November 2000 -0- Vested
296,363 shares at $2.40 per share through April 2000 -0- Vested
40,000 shares at $2.44 per share through July, 2000 -0- Vested
50,000 shares at $2.50 per share through July, 2000 25,000 Vested
100,000 shares at $3.00 per share through December 2000 -0- Vested
36,000 shares at $3.00 per share through July, 2000 15,000 8/95-7/96
</TABLE>
The option 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. Such options
may be compensatory if and when granted based upon the market price of the
Company's stock then prevailing.
In connection with the private placements of 1,547,975 shares of the Company's
common stock in November 1994 and an additional 1,196,125 shares of the
Company's common stock in 1995, the Company issued warrants to acquire 877,500
shares and 598,063 shares, respectively, 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 from December 31, 1996 to April
1997 depending on the date of investment. 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 same exercise prices. This offer was extended on
March 12, 1996 until March 28, 1996. A total of 613,688 warrants representing
$843,821 were exercised.
F-10
<PAGE> 31
The Company also issued to its placement agent and brokers options to acquire
165,750 shares of the Company's common stock at an exercise price of $2.40 per
share in the November 1994 private placement and 110,613 shares of the Company's
common stock at an exercise price of $2.40 per share in the 1995 private
placement. These warrants will expire in November 1999 and March/April 2000,
respectively.
During 1996, the Company's Board of Directors approved the issuance of an
additional 165,000 options in conjunction with employment agreements at an 85%
discount to the market price of the stock on the date of employment. These
options vest 40% after two years of employment and 60% after five years of
employment.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). This Statement is
effective beginning in 1996.
As permitted by SFAS 123, the Company intends to continue to apply the
accounting provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees", with respect to options issued to employees and directors. Adoption
of SFAS 123 will require the Company to disclose additional information relating
to the stock option plan and its stock options and the Company's pro forma net
income and retained earnings per share, as if the options granted were expensed
at their fair market value at the time of grant.
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.
During 1995, the Company issued $3.5 million of Series C Preferred Stock and
$0.5 million thereafter. As of December, 31, 1995, there was $2,121,233 in
Series C Preferred Stock 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 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 by
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, (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
$253,688 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>
F-11
<PAGE> 32
The Company has obtained an option to purchase its current manufacturing
facility for $2,700,000 and intends to exercise its option. The Company has
secured a commitment for a first mortgage loan of $1,860,000 on the building
from General American Insurance Company. The mortgage, which will carry a fixed
effective annual interest rate of 8.65%, will provide 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 shares of the Company's common stock in lieu of $440,000 of the
purchase price. The seller has also agreed to extend a 3 year, $300,000 second
mortgage to the Company bearing a fixed 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 also possesses an option to lease a building in the
Fjardo region of Puerto Rico. This option, which has been successfully renewed
several times, is currently scheduled to expire in July of 1996. If the
building were purchased, the Company would have no significant long-term lease
liabilities unless it exercised its option on the building in Puerto Rico.
The Company has entered into a consulting agreement with a firm in Puerto Rico
to assist it in identifying suitable manufacturing arrangements and provide
introductions to potential suppliers, lenders and distributors of the Company's
products. The agreement calls for monthly payments of $2,000 and 36,000 options
to purchase the Company's common stock at a price of $3.00 per share expiring
five years from the date of grant.
The Company has also signed an agreement with a firm who will write research
reports on the Company. The contract calls for the issuance of warrants
exercisable at $1.75 per share. These warrants expire two years from the date
of issuance.
The Company is also negotiating with other various parties to enter into
consulting arrangements. The Company will compensate consultants either in
cash, shares of common stock, or a combination thereof.
To the extent the fair market value of options issued for services rendered
exceeds exercise prices, the Company will be required to recognize
compensation expense.
10. LEGAL PROCEEDINGS
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. One of these vendors, Lloyds Refrigeration, Inc.,
("Lloyds") has filed suit against the Company and the Company has filed its
counterclaims, (see discussion below). 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 supersedeas
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.
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.
CROWN V. LLOYDS which was filed by the Company in July, 1995 in
response to Lloyds' attempt to foreclose on its mechanics' lien. The
dispute and the lien arose as a result of Lloyd's work on the
construction of the Company's manufacturing facility in Las Vegas. The
Company has had to correct the construction deficiencies made by Lloyds
and seeks to offset its incurred costs against the approximately
$123,000 claimed by Lloyds. The Company anticipates that it will
prevail on the merits of its case.
Standard Chartered Bank, ("Standard"), had provided financing to the
manufacturer of the filler machine and Standard has claimed that it has a $1
million security interest in the filler machine. Based upon the
representations made, the Company entered into a letter of intent to finance $1
million 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 against the
filler manufacturer currently exceed the $1 million amount which Standard is
allegedly owed. The Company cannot predict the ultimate outcome of this claim.
F-12
<PAGE> 33
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,
1995 and 1994, 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.
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, 1995 and 1994 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered and continues to suffer
recurring operating losses and at December 31, 1995 had a working capital
deficit of ($828,290) and an accumulated deficit of ($7,828,203). These
factors, amongst others discussed in Note 1 to the financial statements, raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments relating to the
recoverability of and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
ARTHUR ANDERSEN LLP
New York, New York
April 15, 1996
F-13
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 of 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 15, 1996 By: /s/ CRAIG E. NASH
------------------------------------
CRAIG E. NASH
Chief Executive Officer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities and 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>
/s/ CRAIG E. NASH Chairman of the Board of Directors April 15, 1996
- ------------------------ Chief Executive Officer
CRAIG E. NASH (Principal Executive Officer)
/s/ SCOTT O. NASH Vice Chairman of the Board of Directors April 13, 1996
- ------------------------ President
SCOTT O. NASH
/s/ SCOTT E. HILLEY Vice President, Finance April 15, 1996
- ------------------------ (Principal Accounting Officer)
SCOTT E. HILLEY
/s/ CHRISTOPHER DEMETREE Director April 13, 1996
- ------------------------
CHRISTOPHER DEMETREE
/s/ VINCENT J. CASELLA Director April 15, 1996
- ------------------------
VINCENT J. CASELLA
/s/ LEE ALLEN HOOKER Director April 13, 1996
- ------------------------
LEE ALLEN HOOKER
/s/ ARTHUR M. BERKOWITZ Director April 12, 1996
- ------------------------
ARTHUR M. BERKOWITZ
/s/ LINDA CARRICK, Ph.D. Director April 13, 1996
- ------------------------
LINDA CARRICK, Ph.D.
</TABLE>
21
<PAGE> 1
EXHIBIT 10(Q)
Amendment #1
Employment Contract of Scott E. Hilley
(dtd. June 7, 1995)
Date: December 18, 1995
The purpose of this amendment is to modify Section 5, subparagraph c as
indicated below. All other sections of the employment contract are to remain
the same.
c. As additional compensation for the services to be rendered, Employee
shall also be issued 100,000 options to purchase Common Stock of Crown
Laboratories, Inc. at $.25 per share. Such options will vest to a schedule
(outlined below) as of the beginning employment date. Also upon the beginning
employment date, 125,000 options to purchase Common Stock of Crown Laboratories,
Inc. at $1.01 per share will be granted to the Employee. Both options shall be
subject to the vesting schedule outlined below and will contain a legend per
this agreement.
Vesting is as follows, no pro-rata vesting:
10% Vests day employment begins
40% Vests two years and one day from employment date
50% Vests at the end of five years and one day from the date of
---- employment.
100%
In the event this agreement is terminated prior to the vesting of all options,
if said termination is for cause, the Employee shall return all unvested
options as outlined in the above vesting schedule (no pro-rata vesting).
/s/ Craig Nash, CEO /s/ Scott E. Hilley
- ------------------------------- ------------------------------
Craig Nash, CEO Scott E. Hilley
<PAGE> 2
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective the
18th day of May, 1995, with the beginning employment date of June 7, 1995,
between Crown Laboratories, Inc., a Delaware corporation ("Employer"), and Scott
E. Hilley, ("Employee").
1. Explanatory Statement
a. Crown Laboratories, Inc. (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 of 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 and diabetic diets. Additionally, caloric
enhancement and nutritional supplement products will be available.
Other products will be developed and marketed, from time to time.
b. Employee has specialized expertise as a Vice President of Finance
with a history of progressive financial management within process
manufacturing and distribution companies. The employee will have access
to technical marketing information, financial, and product information
related to the Employer's product. All such information is proprietary
information of the Employer and deemed herein to be subject to the
nondisclosure and noncompete provisions of the employment Agreement.
c. Employer agrees to employ Employee as Vice President of Finance and
Employee agrees to render such services as are designated in Attachment
A of the Employment Agreement for and on behalf of Employer. Employer
may assign additional or different duties from time to time, subject to
the understanding however that there shall be no significant reduction
of responsibilities.
In consideration of this Explanatory Statement, which is a substantive
part of this Agreement, and the mutual obligations set forth in this
Agreement, Employer and Employee hereby agree as follows:
2. Employment
Crown Laboratories, Inc. in Las Vegas, Nevada employs Employee as its
Vice President of Finance and Employee agrees to render such services as
designated in Attachment A to this Agreement for and on behalf of
Employer. Employer may assign Employee
<PAGE> 3
additional or different duties. From time to time, the Company may deem
it necessary for the Employee to travel. Such travel will be approved
by the Employer and reasonable expenses for such travel will be
reimbursed by the Employer to the Employee. Employee accepts employment
with the Employer and agrees to render the services for the Employer on
the terms and conditions set forth in this Agreement. Employer will
have the power to direct, control, and supervise the services to be
performed, the means and manner of performing the services, and the time
of performing the services; provided, however, that the Employer may not
impose any employment duties or constraint which would require the
Employee to violate any current or later enacted law, statute,
ordinance, rule or regulation.
3. Term
The term ("the Initial Term") of this agreement commences on June 7,
1995, and subject to the further provisions of this Agreement, ends on
the day five years from the commencement date of this Agreement.
Thereafter, this agreement automatically renews for successive one year
periods (a "Renewal Term") unless, at least sixty (60) days prior to the
expiration of the Initial Term or any Renewal Term, either party gives
written notice to the other party specifically electing to terminate
this Agreement at the end of the Initial Term or any such Renewal Term.
4. Performance of Services
Employee will render the services to the best of Employee's ability for
and on behalf of Employer. Employee will comply with all laws,
statutes, ordinances, rules and regulations relating to the services.
During the term of this Agreement, Employee may not, at any time or
place, directly or indirectly, engage or agree to engage in the business
of developing, producing or marketing dietary and/or nutritional
products other than to the extent required by the terms and conditions
of this Agreement, unless the Chief Executive Officer approves special
projects from time to time outside the confines of the agreement.
5. Compensation
Employer will pay Employee as exclusive compensation for services
rendered under this Agreement as follows:
a. Compensation from the beginning date of employment, June 7, 1995
will be $85,000/year. At the beginning of the fourth (4) month of
employment, the annual salary will increase to $90,000.
b. Employee's salary during subsequent periods after June 7, 1995 will
be reviewed annually, and may be changed in accordance with Employer's
normal payroll policies. Bonuses, if applicable, will be determined by
the ability of the Employee to successfully meet the objectives
established for this Employee by the Company as reviewed annually.
c. As additional compensation for the service to be rendered hereunder,
Employee shall also be issued 100,000 shares of Common Stock of Crown
Laboratories, Inc., which
2
<PAGE> 4
shares shall vest to a schedule as of the beginning employment date.
Also upon the beginning employment date, 125,000 stock options valued at
85% of market shall have a vesting schedule the same as the Common Stock
with all stocks and options having a legend per this agreement. The
value of the Common Stock shall be the closing Ask price of the shares
listed on the AMEX, ECM, or the principal stock exchange upon which
shares are traded, on the last trading day prior to the beginning
employment date.
Vesting is as follows: Common Stock and Stock Options, no pro
rata vesting.
<TABLE>
<S> <C>
10% Vests day employment begins.
40% Vests two years and one day from employment date.
50% Vests at the end of five years and
--- one day from date of employment.
100%
</TABLE>
In the event this agreement is terminated prior to the vesting of all
shares and/or options, if said termination is for cause, the Employee
shall return all unvested shares and/or options as outlined in the above
vesting schedule (no prorated vesting).
d. During the initial contract period covered by this agreement and
while the officers of the corporation at the signing of this contract
serve controlling 3 of the 7 seats on the Board of Directors, the
vesting schedule presented above shall be in effect. Prior to, and upon
the event that the control of the Board of Directors changes and Craig
Nash is no longer the Chief Executive Officer and Scott Nash is no
longer the President, all shares as provided in this section shall vest
immediately.
5. Vacations and Benefits
a. During each twelve (12) month period during the Initial Term or any
Renewal Term of this Agreement, Employee is entitled to vacation time of
not less than three (3) weeks during which the Employee's compensation
shall continue in full. Employee will take vacation at such time or
times as approved by Employer, which approval shall not be unreasonably
withheld.
b. In addition to all other compensation provided to the Employee
pursuant to this Agreement, Employee is entitled to health insurance, to
participate in the employee incentive and non-qualified stock option
plans, pension plan and in any other fringe benefits which are or may be
provided by Employer to its Employees including, but not limited to
insurance, health, welfare and other benefits. Termination shall not
affect any rights a terminated employee might have under any fringe
benefit plan maintained by the Employer, for a period not to exceed
ninety (90) days after termination, subject, however, to restrictions
which may be placed upon continuation of such coverages by the insurance
providers. Employee will be reimbursed for all Company approved travel
expenses, relocation, and administrative expenses.
7. Confidential Information
a. Employee will acquire knowledge of the Employer's confidential
information. Confidential information is information of a unique nature
relating to the Employer's business operations, internal structure,
financial affairs, programs, product formulations,
3
<PAGE> 5
production methods, procedures, manuals, confidential reports, lists of
clients and prospective clients, sales and marketing methods as well as
the amount, nature, and type of services, products and requirements
preferred by the Employer's clients and the prices paid by the
Employer's clients. Disclosure of this confidential information could
cause a substantial loss to the Employer. Employee agrees that Employee
will not for any purpose disclose to any person or entity any
confidential information obtained by the Employee during employment with
the Employer.
b. Employee may have access to records of the Employer. Records are
all contracts, agreements, financial books, instruments, documents,
client lists, memoranda, data, reports, programs, software, tapes,
Rolodex files, telephone and address books, letters, research, card
decks, listings, programming, and any other instruments, records or
documents relating or pertaining to the customer services by Employee on
the behalf of Employer, the services rendered by the Employee, or the
business of the Employer. Records will remain the Employer's property.
When Employee's employment terminates, the Employee will return to the
Employer all records and will neither make or retain copies of any
records after the termination of Employment.
c. Inventions made or conceived entirely or partially by the Employee
while employed with the Employer and within three years after
termination of the Employee's employment will be the property of the
Employer. Inventions include all creations, whether or nor patentable,
trademarkable, copryrightable, and all ideas, reports, or other creative
works, including without limitation, product formulations, manuals,
related materials which relate to the existing or proposed business of
the Employer or any other business or research or development effort
conducted by the Employer. All of the Employee's inventions which are
copyrightable will be works for hire. Employee will cooperate with
Employer to patent or copyright inventions by executing all documents
tendered by the Employer for the purpose of patenting or copyrighting
the Employee's inventions. This provision does not apply to any
inventions for which no equipment, supplies, facilities or trade secret
information of the Employer was used and which was developed entirely on
the Employee's own time unless:
i. the invention relates
(1) directly to the business of the Employer, or
(2) to Employer's actual or demonstrably anticipated
research and development, or
ii. the invention results from any work performed by the
Employee for the Employer.
8. Restrictive Covenants
a. The Employee will perform services which have a unique value to the
Employer which if used in competition with the Employer could cause
serious harm to the Employer. Employee will develop good will for the
Employer through personal contact with customers and others who have
business relationships with Employer. This good will which is a
proprietary asset of the Employer, may follow Employee after
4
<PAGE> 6
Employment with the Employer terminates. Employee agrees that during
the three year period following termination of Employee's employment for
any reason, Employee will not unless given prior written consent by the
Employer:
i. perform any services, regarding nutritional and/or dietary
products, of the type the Employee performed during employment
with Employer, for any persons or entities who are, or have
been, customers of the Employer.
ii. solicit for employment or employ for any other person or
entity any person who is employed by the Employer during the
same time as the Employee was employed by Employer. Employee
will not persuade any customer or person or entity to
discontinue business with the Employer.
iii. engage, either as a consultant, independent contractor,
proprietor, stockholder, partner, or in any other capacity, in
any business which produces and/or sells dietary and/or
nutritional products or otherwise competes with Employer in any
State of the United States, or United States Territory or in any
foreign country where Employer sold, licensed, or otherwise
provided dietary and/or nutritional products, product marketing
or related services at any time during the Employee's
employment.
b. If any provision or portion of this section of the agreement is held
unreasonable, unlawful, or unenforceable by a court of competent
jurisdiction, the provision will be deemed modified to the extent
necessary for the provisions to be legally enforceable to the fullest
extent permitted by applicable law. Any court of competent jurisdiction
may enforce any provision of this section or modify any provision in
order that the provision will be enforced by the court to the fullest
extent permitted by applicable law.
c. The violation by the Employee of the provisions of Section 7 or 8 of
this Agreement could cause irreparable injury to Employer and there is
no adequate remedy at law for violation of those provisions. Employer
has, in addition to other legal or equitable remedies, the right to
enjoin Employee in a court of equity from violating those provisions.
d. All provisions of Sections 7 and 8 of this Agreement are cumulative.
Compliance with these sections is a condition precedent to the
Employer's obligation to make payments to the Employee under this
Agreement or otherwise. Nothing in this Agreement prohibits Employer
from pursuing any other remedies available to it for a breach or
threatened breach of Section 7 or 8 of this Agreement.
e. As used in Section 8, "clients" and "customers" include any person
or entity that directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control
of any such person or entities which purchase any goods or services from
Employer.
5
<PAGE> 7
9. Termination of Employment
Employer has the right to terminate Employee's employment at any time
and without prior written notice to the Employee upon the occurrence of
any one or more of the following events: (i) the breach by the Employee
of any obligation contained in this Agreement; (ii) the voluntary or
involuntary dissolution of the Employer; (iii) the voluntary or
involuntary liquidation or winding up of the Employer; (iv) for cause.
Upon termination for any other reason other than for (iv) as provided in
this section. Employer shall pay to Employee three (3) months of
severance in the amount of the then effective salary of the Employee at
the data of termination. Such severance payments, and all commissions,
bonuses, salaries, and expenses owned to the Employee will be paid on
the date of termination. Upon termination under (iv) as provided in
this Section, Employer shall pay Employee one (1) month of severance in
the amount of the then effective salary of the Employee at the date of
termination. Upon termination of the Employee's Employment pursuant to
this Section 9, neither party will have any further obligations under
this Agreement, except for Employee obligations under Section 7 and 8.
Each party will remain liable and responsible to each other for all
prior obligations and for all acts and omissions of such party, its
agents, servants, and employees, prior to termination.
Employer may not terminate this Agreement for cause unless Employer has
first given Employee five (5) days prior written notice of termination
which sets forth the grounds of termination, and Employee has failed to
cure the stated grounds for termination within the five (5) days period;
provided however the Employee may have no more than two (2)
opportunities to correct grounds of termination during any consecutive
twelve (12) month period, during the term hereof, commencing upon the
effective date of this Agreement.
10. Arbitration
Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the Arbitrator(s)
may be entered in any court having jurisdiction thereof. The
determination of the Arbitrator(s) shall be binding on both parties.
11. Notices
All notices and other communications required or permitted to be given
by this Agreement must be in writing and must be given and will be
deemed received if and when either hand delivered and a signed receipt
is given, or mailed by registered or certified U.S. mail, return receipt
requested, postage prepaid, and if to the Employer to:
CROWN LABORATORIES, INC.
6780 Caballon Street
Las Vegas, Nevada 89119
(702) 696-9300
Attn: Craig E. Nash - Chief Executive Officer
<PAGE> 8
and if to Employee to:
Scott E. Hilley
64 East Ridge Road
Warwick, NY 10990
or at any other address as either party notifies the other in writing.
12. Other Covenants
The Employer and Employee agree, in addition to the formal personnel
policies as defined in the Employee Handbook of the Company, that for
the purposes of this Agreement the term "cause" as used in Section 9 of
this agreement shall be defined to include, any misconduct,
disobedience, use of discourteous language, withholding of information
when asked by the C.E.O. or the President, non-compliance with
directions as given, and gross negligence of duties as provided for by
this Agreement. Such determinations will be made by the Chief Executive
Officer and documented in writing with a copy provided to the Employee.
If two (2) such disciplinary actions are documented in writing and a
third disciplinary action occurs in any annual period, and termination
of Employment pursuant to Section 9 of this Agreement is not elected by
the Company, then the Employee shall return to the Company 20% of the
shares of Common Stock vested and issued to date granted to the Employee
by this Agreement.
13. Miscellaneous
a. This Agreement binds and benefits Employer, its successors, and
assigns. This Agreement binds and benefits Employee and Employee's
heirs, personal and legal representatives, and guardians. No portion of
this Agreement or interest in it may be assigned by the Employee.
b. The terms and provisions of this Agreement may not be modified
except by written instrument duly executed by Employer and Employee.
c. This Agreement will be governed by and enforced and construed in
accordance with the laws of the State of Nevada.
d. The headings in this Agreement are included for the convenience of
reference and will be given no effect in the construction of this
Agreement.
e. In the event of the breach of this Agreement, the nonbreaching party
may maintain an action for specific performance against the party who is
alleged to have breached any of the terms of the Agreement. If Employee
violated Sections 7 and/or 8, Employee consents to the entry of a
temporary restraining order, a preliminary injunction and a permanent
injunction (or comparable remedies) against Employee. This subsection
will not be construed to limit in any manner any other rights or
remedies an aggrieved party may have by virtue of any breach of this
Agreement.
<PAGE> 9
Each of the parties has the right to waive compliance with any obligation of
this Agreement, but a waiver by any party of any obligation will not be deemed
a waiver of compliance with any other obligation on any subsequent occasion,
nor will any waiver be deemed effective unless in writing and signed by the
party so waiving.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement.
EMPLOYER EMPLOYEE
CROWN LABORATORIES, INC.
By: CRAIG E. NASH, C.E.O. SCOTT E. HILLEY
----------------------- -------------------------
Craig E. Nash - Scott E. Hilley
Chief Executive Officer
May 18, 1995
May 19, 1995 -------------------------
----------------------- Effective Date
Date
June 7, 1995
-------------------------
Starting Employment Date
<PAGE> 10
ATTACHMENT A
JOB DESCRIPTION
TITLE: Vice President of Finance
REPORTS TO: Chief Executive Officer
RESPONSIBILITIES:
1. Preparation and implementation of good accounting practices and
procedures for Chief Executive Officer's approval.
2. Establishment of a system of internal controls. These internal controls
are to include, but are not limited to:
a. Budgetary auditing and the providing of reports to department heads
of monthly budgetary status, status of budget year to date, and
warnings of excess charges.
b. Transaction tracing and paper trail audits.
c. Expense policy, expense tracking, and expense report receipts.
d. County and local taxes status and tracking.
e. Banking records and transaction tracking, including monthly
reconciliation.
f. Corporate account tracing and daily balances in all corporate bank
accounts.
g. Development of a system for maintenance of the Company financial
records for tax and audit purposes.
h. Billing and collections.
i. Implementation, where feasible, of segregation of duties control.
j. Periodic account analysis and substantiation.
k. Maintenance of general ledger with reconciliations to subsidiary
ledgers.
l. Disbursement controls.
m. Maintenance of detailed fixed asset ledgers.
9
<PAGE> 11
n. Maintenance of stock and option sub-ledgers.
o. When required, assist the President in the maintenance of inventory
quantities and evaluation of production records.
3. Review statements for management use are to be generated by the 10th day
of the month for the preceding thirty day period. Review statements are
to be generated for SEC filing purposes no later than twenty-one days
after the quarters end.
4. Generation of financial information for statistical purposes and the
building of accounting history files.
5. Development of cash flows and operating scenarios based upon the
financial position of the Company.
6. Audit of the performance of the Company in meeting its financial
projections.
7. Preparation of routine cost analysis for auditing of Company profit and
loss.
8. Collection of accounts receivable.
9. Corporate interface with the independent accountants, and responsible to
management for good policy and control.
10. Preparation of corporate credit applications and maintenance of
corporate credit information.
11. Preparation of cash flow projections and other financial statistical
information at the direction of the Chief Executive Officer as required
weekly.
12. Weekly reports to Chief Executive Officer of the cash position of the
Company, its current profit/loss performance, and cash requirements of
the Company.
13. Routine internal audits on a rotating basis such that all areas and
departments are audited a minimum of once per year prior to independent
audit.
14. Direct responsibility of accounts payable, general ledger, accounts
receivable, and inventory control functions of the Company.
15. Presentations to Executive Committees as designated by the Chief
Executive Officer at the Chief Executive Officer's discretion (weekly
and monthly).
10
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated April 15, 1996, included in this Form 10-KSB, into the Company's
previously filed Form S-3 Registration Statements (File Nos. 33-59055
and 033-65421).
ARTHUR ANDERSEN LLP
New York, New York
April 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOW AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 667,431
<SECURITIES> 0
<RECEIVABLES> 60,121
<ALLOWANCES> 0
<INVENTORY> 108,994
<CURRENT-ASSETS> 891,055
<PP&E> 8,887,442
<DEPRECIATION> 208,679
<TOTAL-ASSETS> 9,986,302
<CURRENT-LIABILITIES> 1,719,345
<BONDS> 0
0
2,121,233
<COMMON> 14,290
<OTHER-SE> 4,335,398
<TOTAL-LIABILITY-AND-EQUITY> 9,986,302
<SALES> 80,100
<TOTAL-REVENUES> 0
<CGS> 28,639
<TOTAL-COSTS> 3,709,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238,011
<INCOME-PRETAX> (3,824,092)
<INCOME-TAX> 15,000
<INCOME-CONTINUING> (3,839,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,839,092)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> 0
</TABLE>
