<PAGE> 1
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1933
Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State of Incorporation) (I.R.S. Employer I.D. No.)
6780 Caballo Street
Las Vegas, Nevada 89119
(Address of Principal Executive Office)
(702) 696-9300
(Registrant's Telephone Number, Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of outstanding shares of the registrant's only class of common stock
as of March 31, 1997.
Common Stock, $.001 par value - $19,813,912
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward looking statements. Except for the historical information contained
this Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997,
the matters discussed herein include forward-looking statements.
Such forward-looking statements, in addition to information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Quarterly Report, are based on the Company's
current expectations and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected or
implied in any forward-looking statements made by, or on behalf of, the
Company. These risks and uncertainties, include, but are not limited to (i) the
anticipated growth in demand for the Company's products, (ii) the anticipated
growth of the Company's revenues from development, manufacture and sale of the
Company's products, (iii) the anticipated expansion of the Company's
international activities, (iv) the impact of competitive products and pricing
and, (v) other risks which are identified from time to time in the Company's
other SEC reports and press releases, copies of which are available from the
Company upon request.
When used in this Quarterly Report, the words "intend", "estimated", "believe",
"expect", and similar expressions which are not historical are intended to
identify forward-looking statements. The Company assumes no obligation to
update any forward-looking statements contained herein or that may be made from
time to time by, or on behalf of, the Company.
The Company has continued in the pre-marketing phase of operation. For the three
month period ended March 31, 1997 the Company incurred losses of ($921,504) vs.
($906,992) in the same period in 1996. The Company has incurred losses
associated with additional salary expense as a result of additions to staff,
other operating expenses and certain expenses charged to start-up costs in the
engineering, design, and modifications to its facility, processes and
formulations associated with the Company's entry into the market. The Company
has incurred ($313,527) in research and development and start-up expenses which
represent 34% of the ($921,504) losses incurred in the quarter ended March 31,
1997. The Company had sales of $33,732 of dry-mix products for the first quarter
ended on March 31, 1997. The accumulated consolidated deficit at March 31, 1997,
was ($13,373,376) while shareholder's equity was $8,503,309.
The Securities and Exchange Commission (SEC) and Financial Accounting Standards
Board (FASB) have issued stringent guidelines to account for research and
development and certain other start-up costs. The SEC has adopted a view that
they will not accept deferred start-up costs (capitalization of start-up costs
on the Balance Sheet) if the registrant is not in an industry where deferral is
not a widely accepted policy. Crown has been advised by its auditors that it is
in an industry where deferral is not a widely accepted policy. Consequently,
Crown expensed $313,527 of start-up expense for the first quarter 1997.
Start-up expenses of $275,284 were similarly expensed in first quarter 1996.
On February 28, 1997, the Company announced a three-year agreement with renewal
options with McKesson Corporation's US Health Care unit. The agreement calls for
McKesson to distribute Crown's liquid nutritional and dietary products to the
home health care, hospital, and nursing home markets. Management believes that
this best effort agreement will produce revenues growing to $1.5 million per
month during the ensuing months. There can be no assurances that this estimate
will be reached. The agreement has a thirty day cancellation provision.
On March 4, 1997, the Company announced that the company and Tufts University
have embarked on an initiative in Human Nutrition, an alliance to pursue a
variety of joint activities in the areas of nutritional product research,
education, and public information dissemination. Specific activities will
include the formation of a Crown/Tufts steering committee to be guided by a
Tufts Associate Dean, and the establishment of graduate fellowships to be funded
by Crown for Tufts advanced graduate students studying human nutrition science.
1
<PAGE> 3
Crown will contribute $80,000 during the first year, and if continued, $100,000
each following year for four years. The agreement is a year to year obligation
with cancellation clauses for both parties.
FINANCIAL CONDITION
Working capital at March 31, 1997 was $1,361,317 with approximately $650,000 in
accounts payable attributable to capital expenditures and leasehold
improvements. Cash and equivalents balances were $2,289,908 as of March 31,
1997. The Company raised an additional $1 million from the sale of Series E
Preferred Stock on July 31, 1996, and an additional $3 million from the sale of
Series E Preferred stock on March 7, 1997, as outlined below in the Funding
section.
Based upon the cash proceeds provided by the sale of preferred stock offset by
the required and intended use of proceeds, losses incurred since December 31,
1996, and anticipated results of operations expected for the remainder of 1997,
management of the Company believes that sufficient cash resources are available
to enable the Company to continue in existence through at least December 31,
1997. After that time the Company may require additional funds to support its
working capitals needs as it begins to expand into its markets. The Company is
presently exploring its alternatives for raising additional funds. 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. There can be no assurances that the Company will be able
to secure additional financing, or, if additional financing is obtained, that it
will be on terms and conditions that are acceptable to the Company.
FUNDING
On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (August 1, 1997, and August
1, 1998). The Series E Preferred Stock is convertible into common shares based
on discounts to the market price at the time of conversion which range from 15%
to 31% depending on the time they are held from the issuance date, (the longer
the stock is held, the deeper the discount). Under this conversion formula, as
the Common Stock price drops, the number of Common Shares into which Series E
Preferred Stock is convertible grows. The number is not subject to a ceiling. As
of December 31, 1996, there was $1,000,000 in Series E Preferred Stock
outstanding. On March 3, 1997, the Regulation S investor notified the Company of
its intention to convert its Series E Preferred Stock into shares of the
Company's Common Stock. Under the conversion formula for the Series E Preferred
Stock, the Regulation S investor was issued 1,018,424 shares of the Company's
Common Stock on March 7, 1997.
On March 7, 1997, the Company raised an additional $3 million through the sale
pursuant to Regulation S under the Securities Act of 1933, as amended, of its
Series E Preferred Stock. The Series E Preferred Stock imputes an average
effective interest rate of 6% which is payable in shares of the Company's Common
Stock on the "Dividend Dates", (August 1, 1997, and August 1, 1998). The Series
E Preferred Stock is convertible into common shares at a rate equal to 10,000
divided by the market value of the Common Stock adjusted by a discount factor
which ranges from 15% to 31% depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless the
Common Stock price falls below $0.75, in which case the discount no longer
applies). Under this conversion formula, as the Common Stock price drops, the
number of Common Shares into which Series E Preferred Stock is convertible
continues to grow. the number is not subject to a ceiling. A total of 200,000
five year options to purchase the Company's Common Stock at $2.50 per share were
issued to two finders for their role in raising these funds.
On April 9, 1997, the Company announced that its board of directors authorized
the expenditure of up to $500,000 for market purchases of its common stock. The
Company will make purchases from time to time as market conditions permit and in
such amounts as it deems advisable. Any common stock reacquired would be
retained by the Company as treasury stock. The authorization to make these
purchases, which may be discontinued at any time, does not constitute a
commitment on the part of Crown Laboratories, Inc. to buy any specific amount of
its shares.
2
<PAGE> 4
CROWN LABORATORIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
UNAUDITED AUDITED
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,289,908 $ 579,488
Accounts Receivable 50,418 11,882
Inventory
Raw & Packaging Materials 246,981 243,686
Work in Process 8,976 5,800
Finished Goods 7,802 33,418
Prepaid expenses & employee and
officer advances 185,467 155,806
----------- -----------
Total current assets 2,789,552 1,030,080
PROPERTY AND EQUIPMENT
Leasehold improvements 1,315,258 1,300,043
Machinery & Equipment 8,541,421 8,410,629
----------- -----------
9,856,679 9,710,672
Accumulated Depreciation
& Amortization (477,865) (423,674)
----------- -----------
Net Property and Equipment 9,378,814 9,286,998
MACHINERY RIGHTS & BLUEPRINTS 242,917 242,917
DEPOSITS & DEFERRED ASSETS 487,378 490,700
----------- -----------
Total assets $12,898,661 $11,050,695
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
and capital lease liabilities $ 266,252 $ 480,810
Accounts payable and accrued expenses 1,161,985 1,285,019
----------- -----------
Total current liabilities 1,428,237 1,765,829
ACCRUED SALES TAX PAYABLE 263,575 288,289
LONG-TERM DEBT & CAPITAL LEASE
LIABILITIES 2,703,810 2,558,191
SHAREHOLDERS' EQUITY
Preferred stock - $0.001 par value;
5,000,000 shares authorized;
300 shares outstanding in 1997
and 250 shares in 1996 3,000,000 1,024,997
Common Stock - $0.001 par value;
50,000,000 shares authorized;
19,813,912 and 18,795,488 shares
outstanding in 1997 and 1996,
respectively 19,813 18,795
Additional paid-in capital 18,856,602 17,846,466
Accumulated deficit (13,373,376) (12,451,872)
----------- -----------
Total shareholders' equity 8,503,039 6,438,386
Total liabilities and
shareholders' equity $12,898,661 $11,050,695
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
and Integral Part of these Financial Statements
3
<PAGE> 5
CROWN LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Net Sales $ 33,732 $ --
Cost of Sales (11,132) --
---------- ----------
Gross Profit 22,600 --
Research & Development Start Up Costs 313,527 275,284
General and Administrative Expenses 527,216 620,612
---------- ----------
Loss From Operations (818,143) (895,896)
Other Income (Expense)
Other Expense (17,492) 25,200
Interest expense (89,475) (41,162)
Interest income 3,606 4,865
---------- ----------
Loss before income taxes (921,504) (906,992)
Income Tax Provision -- --
---------- ----------
Net Loss $ (921,504) $ (906,992)
========== ==========
NET LOSS PER SHARE $(0.05) $(0.06)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 19,187,159 14,317,791
========== ==========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
4
<PAGE> 6
CROWN LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS EQUITY
FOR THE QUARTER ENDED MARCH 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
SHARES OF COMMON ADDITIONAL ACCUMULATED PREFERRED
COMMON STOCK PAID-IN CAPITAL DEFICIT STOCK TOTAL
---------- ------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DEC. 31, 1996 18,795,488 $18,795 $17,846,466 $(12,451,872) $1,025,000 $6,438,389
Compensation expense for options
granted to employees and consultants -- -- 31,354 -- -- 31,354
Series E Preferred Stock issued -- -- -- -- 3,000,000 3,000,000
Shares issued on the conversion
of Series E Preferred Stock 1,018,424 1,018 1,023,982 -- (1,025,000) --
Fund raising expenses -- -- (45,200) -- -- (45,200)
Warrants converted -- -- -- -- -- --
Warrants converted -- -- -- -- -- --
Net loss for the period ended
March 31, 1996 -- -- -- (921,504) -- (921,504)
---------- ------- ----------- ------------ ---------- ----------
BALANCE AS OF MARCH 31, 1997 19,813,912 $19,813 $18,856,602 $(13,373,376) $3,000,000 $8,503,039
========== ======= =========== ============ ========== ==========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
5
<PAGE> 7
CROWN LABORATORIES, INC.
Consolidated Statements of Cash Flow
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (921,504) $ (906,993)
Add/(deduct) items not impacting cash:
Depreciation and amortization 54,194 51,611
Issuance of shares to employees and consultants 31,353 42,343
Changes in Assets and Liabilities:
(Increase)/Decrease in receivables (38,536) (40,239)
(Increase)/Decrease in inventories 19,145 148,379
(Increase)/Decrease in prepaid expenses and employee advances (29,661) 115,406
Increase/(Decrease) in accounts payable and accrued expenses (123,034) 180,888
----------- ----------
Total Cash Generated from/(used for) operations (1,008,043) (408,605)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (146,007) 589,509
(Increase)/Decrease in deposits and deferred assets 3,322 255,499
Increase/(Decrease) in accrued sales taxes payable (24,714) 74,126
Total cash (used in)/generated from investing activities (167,399) 919,134
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans - -
Repayments of loans payable (68,939) (1,424,367)
Proceeds from issuance of common and preferred stock and the
exercise of warrants 3,000,000 1,065,382
Fundraising costs (45,200) (16,098)
Repurchase of common shares - -
Prior period adjustments - -
-----------
Total cash provided by/(used in) financing activities 2,885,861 (375,083)
----------- ----------
Net increase/(decrease) in cash and cash equivalents 1,710,420 135,446
Cash and cash equivalents, beginning of period 579,488 579,488
----------- ----------
Cash and cash equivalents, end of period $ 2,289,908 $ 714,934
=========== ==========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral part of these Financial Statements
6
<PAGE> 8
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BACKGROUND OF ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and with instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1997, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Crown
Laboratories, Inc. Annual Report on Form 10-KSB.
2. MANUFACTURING FACILITY
The Company presently 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 a twelve month option to purchase its current manufacturing
facility for $3,185,000. The Company sub-leased 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 options. The Company collected $25,200 in lease revenue
during 1995 and $75,600 during 1996 which amounts are reflected in the
financial statements of the Company.
3. FINANCING
On July 31, 1996, the Company raised $1 million through the sale of its Series
E Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (August 1, 1997, and August
1, 1998). The Series E Preferred Stock is convertible into common shares based
on discounts to the market price at the time of conversion which range from 15%
to 31% depending on the time they are held from the issuance date, (the longer
the stock is held, the deeper the discount). Under this conversion formula, as
the Common Stock price drops, the number of Common Shares into which Series E
Preferred Stock is convertible grow. The number is not subject to a ceiling. As
of December 31, 1996, there was $1,000,000 in Series E Preferred Stock
outstanding. On March 3, 1997, the Regulation S investor notified the Company
of its intention to convert its Series E Preferred Stock into shares of the
Company's Common Stock. Under the conversion formula for the Series E Preferred
Stock, the Regulation S investor was issued 1,018,424 shares of the Company's
Common Stock on March 7, 1997.
On March 7, 1997, the Company raised $3 million through the sale pursuant to
Regulation S under the Securities Act of 1933, as amended, of its Series E
Preferred Stock. The Series E Preferred Stock imputes an average effective
interest rate of 6% which is payable in shares of the Company's Common Stock on
the "Dividend Dates", (August 1, 1997, and August 1, 1998). The Series E
Preferred Stock is convertible into common shares at a rate equal to 10,000
divided by the market value of the Common Stock adjusted by a discount factor
which ranges from 15% to 31% depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless
the Common Stock price falls below $0.75, in which case the discount no longer
applies). Under this conversion formula as the Common Stock price drops, the
number of Common Shares into which Series E
7
<PAGE> 9
Preferred Stock is convertible continues to grow. The number is not subject to
a ceiling. A total of 200,000 five year options to purchase the Company's
Common Stock at $2.50 per share were issued to two finders for their role in
raising these funds.
During the first quarter ended March 31, 1997, a total of 463,750 options and
warrants expired.
On April 9, 1997, the Company announced the authorization of expenditures up to
$500,000 for purchases of its common stock to be retained as treasury stock.
The authorization to make these purchases may be discounted at any time and
does not constitute a commitment by the Company to buy a specific amount of its
shares.
Based upon the above cash proceeds provided by the sale of preferred stock
offset by the required and intended use of proceeds, losses incurred since
December 31, 1996, and anticipated results of operations expected to be
incurred during the remainder of 1997, management of the Company believes that
sufficient cash resources are available to enable the Company to continue
operations through at least December 31, 1997.
4. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Crown
Laboratories, Inc. and its wholly-owned subsidiaries, which include Crown
Russia OOO.
5. 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 $26,576 subject to annual inflation
escalations which commenced in September 1996. During 1997, the Company paid
$79,728 in lease payments for the building. Minimum payments due under the
building lease are as follows:
Year Ending
December 31,
------------
1997 $318,912
1998 $318,912
1999 $159,456
2000 -0-
The Company has obtained a twelve month option to purchase its current
manufacturing facility for $3,185,000. The Company sub-leased 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 options. The Company collected
$25,200 in lease revenue during 1995 and $75,600 during 1996 which amounts are
reflected in the financial statements of the Company.
The Company has also signed an agreement with a firm that 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 is required to recognize compensation
expense.
8
<PAGE> 10
6. LITIGATION
The Company is subject to normal business litigation and claims concerning
products and services rendered to the Company.
In addition to normal business litigation, the Company has the following
material litigation:
Crown V. Swinney et al., the Company sought to enforce the legends on
its stock requiring compliance with 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, included in Deposits and Deferred Assets on the Balance Sheet,
to cover its potential liability in this case. As the enforceability of
the Company's legends on its securities was at stake, the Company posted
a bond and appealed the Nevada District Court's decision. This appeal
was accepted by the Nevada Supreme Court. Although, the Company believes
that its liability, if any, will be limited to attorney's fees, it has
expensed the amount of the preliminary judgment approximately $64,000 in
1995. This dispute was resolved on March 31, 1997. The final settlement
amount was $69,000.
Crown V. Rolfenade et al., was filed by the Company, in March 1995, and
subsequently amended to incorporate all of the defendants "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 under
the Hague Convention. Other defendants named in the suit filed a Motion
to Quash Service which was lost. They appealed to the Nevada Supreme
Court. Their appeal was denied. They have since filed an answer. The
Company cannot predict the outcome of its claims.
Crown V. Lloyds On August 8, 1996,a settlement was reached whereby
Lloyds would reduce its claim from $123,000 to $35,000 which Crown
subsequently paid on August 8, 1996 with complete releases on both
sides.
7. SUBSEQUENT EVENTS
On May 5, 1997, Crown Laboratories' Board of Directors adopted a Shareholder
Rights Plan designed to protect shareholders from various abusive takeover
tactics, including attempts to acquire control of the Company at an inadequate
price.
The plan is designed to assure that any acquisition of the company and/or any
acquisition of control of the company would take place under circumstance in
which the board of directors can secure the best available transaction for all
of the company's stockholders. Under the plan, each stockholder will receive a
dividend of one right for each share of the company's outstanding common stock.
Craig Nash, Crown's chairman and CEO said, "The rights are designed to protect
the company and its shareholders against market accumulation programs and other
abusive takeover tactics. They are not aimed at preventing a takeover but rather
are intended to encourage a potential buyer to negotiate appropriately with the
board prior to attempting a takeover."
Initially, the rights are attached to the company's common stock and are not
exercisable. They become detached from the common stock and become immediately
exercisable after any person or group that is not a "grandfathered stockholder"
becomes the beneficial owner of 15% or more of the company's common stock or 10
days after any person or group announces a tender or exchange offer that would
result in that same beneficial ownership level, subject only to certain
"permitted offers."
9
<PAGE> 11
If a buyer who is not a "grandfathered stockholder" becomes a 15% owner in the
company, all rights holders, except the buyer, will be entitled to purchase
preferred stock in the company at a price discounted from the then market
price. In addition, if the company is acquired in a merger after such an
acquisition, all rights holders except the buyer will also be entitled to
purchase stock in the buyer at a discount in accordance with the plan. The
distribution of rights will be made to common stockholders of record on May 16,
1997 and shares of common stock that are newly-issued after that date will also
carry rights until the rights become detached from the common stock. The rights
will expire on May 15, 2007. The company may redeem the rights for $0.01 each
at any time before a buyer acquires a 15% position in the company and under
certain other circumstances. The rights distribution is not taxable to
stockholders. A complete description of the Shareholder Rights Agreement and
Series F Preferred Stock may be found in the Form 8-A filed with EDGAR on May
13, 1997.
On May 5, 1997, the Company approved the reservation of 500,000 shares of
Series F Preferred stock which may be issuable pursuant to the Rights Agreement
dated as of May 5, 1997.
On April 21, 1997, the Company hired Calvin T. Mathews as its new Chief
Financial Officer. Prior to joining Crown Laboratories, Mr. Mathews served as
Director of Mergers and Acquisitions for FundMinder, Inc., a California based
investment management firm. Prior to joining FundMinder, Inc., Mr. Mathews
served as Chief Executive Officer of Schabacker Investment Management, Inc. In
addition, Mr. Mathews was the President and Chief Financial Officer for Crown
Laboratories from June 30, 1990 to September 30, 1993. Mr. Mathews also serves
on the Board of Directors of Optelecom, Inc. (OTC: OPTC), a leading provider of
optical communications and laser systems.
On April 9, 1997, the Company announced that its board of directors authorized
the expenditure of up to $500,000 for purchases of its common stock. The Company
will make purchases from time to time as market conditions permit and in such
amounts as it deems advisable. Any common stock reacquired would be retained by
the Company as treasury stock. The authorization to make these purchases, which
may be discontinued at any time, does not constitute a commitment on the part of
Crown Laboratories, Inc. to buy any specific amount of its shares.
From April 1, 1997 through May 14, 1997, an additional 297,783 shares, options,
or warrants were repurchased or expired.
10
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
4(b) Certificate of Designation of Series F Junior
Participating Preferred Stock (1)
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN LABORATORIES, INC.
Dated: May 14, 1997 By: /s/ CRAIG E. NASH
------------------------------
Craig E. Nash
Chief Executive Officer
Chairman, Board of Directors
By: /s/ CALVIN T. MATHEWS
------------------------------
Calvin T. Mathews
Chief Financial Officer
11
<PAGE> 1
CERTIFICATE OF DESIGNATION
OF
SERIES F JUNIOR PARTICIPATING PREFERRED STOCK
OF
CROWN LABORATORIES, INC.
(PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW)
Crown Laboratories, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation") hereby
certifies that the following resolution was duly adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law of the State of Delaware at a meeting duly called and held on
May 5, 1997.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation in accordance with the provisions of the
Corrected, Restated Certificate of Incorporation, the Board of Directors hereby
creates a series of Series F Junior Participating Preferred Stock, with a par
value of $0.001 per share, of the Corporation and hereby states the designation
and number of shares, and fixes the relative rights, preferences and limitations
thereof (in addition to the provisions set forth in the Corrected, Restated
Certificate of Incorporation which are applicable to the Preferred Stock of all
classes and series) as follows:
SERIES F JUNIOR PARTICIPATING PREFERRED STOCK
- ---------------------------------------------
SECTION 1. DESIGNATION, PAR VALUE AND AMOUNT. The shares of such series shall
be designated as "Series F Junior Participating Preferred Stock" (hereinafter
referred to as "Series F Preferred Stock"), the shares of such series shall be
with par value of $0.001 per share, and the number of shares constituting such
series shall be 500,000; provided, however, that, if more than a total of
500,000 shares of Series F Preferred Stock shall be issuable upon the exercise
of Rights (the "Rights") issued pursuant to the Rights Agreement, dated as of
May 5, 1997 between the Corporation and Securities Transfer Corporation, as
Rights Agent (as amended from time to time) (the "Rights Agreement"), the Board
of Directors of the Corporation, pursuant to Section 151 of the General
Corporation Law of the State of Delaware, shall direct by resolution or
resolutions that a certificate be properly executed, acknowledged and filed
providing for the total number of shares of Series F Preferred Stock authorized
to be issued to be increased (to the extent that the Corrected, Restated
Certificate of Incorporation then permits) to the largest number of whole
shares (rounded up to the nearest whole number) issuable upon exercise of the
Rights.
<PAGE> 2
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series F Preferred Stock with respect to dividends, the holders of shares of
Series F Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of assets legally available for the purpose,
quarterly dividends payable in cash on the first business day of November,
February, May and August in each year (each such date being referred to herein
as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a share
of Series F Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1.00 or (b) subject to the provision for
adjustment hereinafter set forth, 1,000 times the aggregate per share amount of
all cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock, par value $0.001 per share, of the
Corporation (the "Common Stock") or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series F Preferred Stock. In the event
the Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series F Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series F Preferred Stock as provided in paragraph (a) above immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series F
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
<PAGE> 3
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series F Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series F Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series F Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Series F Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders
of shares of Series F Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Series F Preferred
Stock shall have the following voting rights:
(a) Except as provided in paragraph C of this Section 3 and subject
to the provision for adjustment hereinafter set forth, each share of Series F
Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters
submitted to a vote of the stockholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series F Preferred
Stock were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series F Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(c) (i) If, on the date used to determine stockholders of record
for any meeting of stockholders for the election of directors, a default in
preference dividends
<PAGE> 4
(as defined in subparagraph (v) below) on the Series F Preferred Stock shall
exist, the holders of the Series F Preferred Stock shall have the right, voting
as a class as described subparagraph (ii) below, to elect two directors (in
addition to the directors elected by holders of Common Stock of the
Corporation). Such right may be exercised (a) at any meeting of stockholders
for the election of directors or (b) at a meeting of the holders of shares of
Voting Preferred Stock (as hereinafter defined), called for the purpose in
accordance with the By-laws of the Corporation, until all such cumulative
dividends (referred to above) shall have been paid in full or until
non-cumulative dividends have been paid regularly for at least one year.
(ii) The right of the holders of Series F Preferred Stock to
elect two directors, as described above, shall be exercised as a class
concurrently with the rights of holders of any other series of Preferred Stock
upon which voting rights to elect such directors have been conferred and are
then exercisable. The Series F Preferred Stock and any additional series of
Preferred Stock which the Corporation may issue and which may provide for the
right to vote with the foregoing series of Preferred Stock are collectively
referred to herein as "Voting Preferred Stock."
(iii) Each director elected by the holders of shares of Voting
Preferred Stock shall be referred to herein as a "Preferred Director." A
Preferred Director so elected shall continue to serve as such director for one
year, except that upon any termination of the right of all such holders to vote
as a class for Preferred Directors, the term of office of such directors shall
terminate. Any Preferred Director may be removed by, and shall not be removed
except by, the vote of the holders of record of a majority of the outstanding
shares of Voting Preferred Stock then entitled to vote for the election of
directors, present (in person or by proxy) and voting together as a single
class (a) at a meeting of the stockholders, or (b) at a meeting of the holders
of shares of such Voting Preferred Stock, called for the purpose in accordance
with the By-laws of the Corporation, or (c) by written consent signed by the
holders of a majority of the then outstanding shares of Voting Preferred Stock
then entitled to vote for the election of directors, taken together as a single
class.
(iv) So long as a default in any preference dividends on the
Series F Preferred Stock shall exist or the holders of any other series of
Voting Preferred Stock shall be entitled to elect Preferred Directors, (a) any
vacancy in the office of a Preferred Director may be filled (except as provided
in the following clause (b)) by an instrument in writing signed by the
remaining Preferred Director and filed with the Corporation and (b) in the case
of the removal of any Preferred Director, the vacancy may be filled by the vote
or written consent of the holders of a majority of the outstanding shares of
Voting Preferred Stock then entitled to vote for the election of directors,
present (in person or by proxy) and voting together as a single class, at such
time as the removal shall be effected.
<PAGE> 5
Each director appointed as aforesaid by the remaining Preferred Director shall
be deemed, for all purposes hereof, to be a Preferred Director. Whenever (x)
no default in preference dividends on the Series F Preferred Stock shall exist
and (y) the holders of other series of Voting Preferred Stock shall no longer
be entitled to elect such Preferred Directors, then the number of directors
constituting the Board of Directors of the Corporation shall be reduced by two.
(v) For purposes hereof, a "default in preference dividends" on
the Series F Preferred Stock shall be deemed to have occurred whenever the
amount of cumulative and unpaid dividends on the Series F Preferred Stock shall
be equivalent to six full quarterly dividends or more (whether or not
consecutive), and, having so occurred, such default shall be deemed to exist
thereafter until, but only until, all cumulative dividends on all shares of the
Series F Preferred Stock then outstanding shall have been paid through the last
Quarterly Dividend Payment Date or until, but only until, non-cumulative
dividends have been paid regularly for at least one year.
(d) Except as set forth herein (or as otherwise required by
applicable law), holders of Series F Preferred Stock shall have no general or
special voting rights and their consent shall not be required for taking any
corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series F Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series F Preferred Stock
outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series F Preferred Stock.
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series F Preferred Stock,
except dividends paid ratably on the Series F Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
(except as provided in (iv) below) shares of any stock ranking junior (either
as to
<PAGE> 6
dividends or upon liquidation, dissolution or winding up) to the Series F
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series F Preferred Stock;
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series F Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series F Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series
or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series F Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued shares
of Preferred Stock and may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth herein, in the
Corrected, Restated Certificate of Incorporation, in any other Certificate of
Amendment creating a series of Preferred Stock or as otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Subject to the prior and superior rights of holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series F Preferred Stock with respect to rights upon liquidation,
dissolution or winding up (voluntary or otherwise), no distribution shall be
made to the holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series F Preferred Stock
unless, prior thereto, the holders of shares of Series F Preferred Stock shall
have received $1.000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series F Liquidation Preference"). Following the payment of
the full amount of the
<PAGE> 7
Series F Liquidation Preference, no additional distributions shall be made to
the holders of shares of Series F Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Capital Adjustment") equal to the quotient obtained by dividing (i) the
Series F Liquidation Preference by (ii) 1,000 (such number in clause (ii), the
"Adjustment Number"). Following the payment of the full amount of the Series
F Liquidation Preference and the Capital Adjustment in respect of all
outstanding shares of Series F Preferred Stock and Common Stock, respectively,
holders of Series F Preferred Stock and holders of Common Stock shall receive
their ratable and proportionate share of the remaining assets to be distributed
in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock
and Common Stock, on a per share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series F Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series F Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of Series F Preferred Stock
and the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not sufficient
assets available to permit payment in full of the Capital Adjustment then such
remaining assets shall be distributed ratably to the holders of Common Stock.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series F Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series F Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
<PAGE> 8
SECTION 8. NO REDEMPTION. The shares of Series F Preferred Stock shall
not be redeemable.
SECTION 9. RANKING. The Series F Preferred Stock shall rank junior to
all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
SECTION 10. AMENDMENT. The Restated Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series F
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series F
Preferred Stock, voting separately as a class.
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its Chairman of the Board and attested by its Chief
Financial Officer as of the 5th day of May, 1997.
/s/ CRAIG NASH
- ---------------------------------
Name: Craig Nash
Title: Chief Executive Officer
Attest:
/s/ CALVIN T. MATHEWS
- ---------------------------------
Name: Calvin T. Mathews
Title: Chief Financial Officer
<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 STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,289,908
<SECURITIES> 0
<RECEIVABLES> 50,418
<ALLOWANCES> 0
<INVENTORY> 263,759
<CURRENT-ASSETS> 2,789,552
<PP&E> 9,856,679
<DEPRECIATION> (477,865)
<TOTAL-ASSETS> 12,898,661
<CURRENT-LIABILITIES> 1,428,237
<BONDS> 0
0
3,000,000
<COMMON> 19,813
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,898,661
<SALES> 33,732
<TOTAL-REVENUES> 0
<CGS> 11,132
<TOTAL-COSTS> 840,743
<OTHER-EXPENSES> 17,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,475
<INCOME-PRETAX> (921,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (921,504)
<EPS-PRIMARY> (.05)
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